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India's Central Bank likely to raise key rates by 25 bps in Jan end
January, 06th 2011

India's central bank is expected to raise key rates by at least 25 basis points by the end of this month to tackle rising inflationary pressures, while analysts expect a total of 75 basis points increase in rates in 2011.

Median forecasts for January have been upwardly revised by 25 basis points since the last poll in mid-December as food and fuel prices push up inflation.

Of 17 economists surveyed, 12 expect the Reserve Bank of India (RBI) to increase rates by 25 basis points in January, while one expects a 50 basis point increase. The other four expect the RBI to keep rates steady in January.

The RBI's next policy review is on Jan. 25. The RBI's key lending rate, or the repo rate , currently at 6.25 percent, is seen at 6.5 percent by the end of January and at 7 percent by the end of 2011, the poll found.

The reverse repo rate, or borrowing rate, which stands at 5.25 percent, is seen at 5.5 percent by the end of January and at 6 percent by the end of December. "Recent weekly food and fuel data suggests that the stickiness in inflation is still prevailing. I expect headline inflation to be around 6.5 percent by end-March," said D.K. Joshi, principal economist at CRISIL in Mumbai.

"For the next fiscal year starting April 2011, inflation would average around 5.8 percent. We have to wait for more data. Right now it seems like the central bank will continue with its aggressive tightening as growth is strong and inflation is high," he said.

India's food inflation accelerated to a 10-week high in mid-December on rising prices of vegetables, while the fuel index also rose, adding to inflationary worries.

India's headline inflation eased in line with expectations to its lowest level in a year for November, at 7.48 percent on an annual basis, but data for December due on Jan. 14 is expected to show a return to an upwards trajectory.

India's economy, Asia's third-largest, is expected to expand by at least 8.5 percent in 2010/11, the fastest pace among major Asian economies after China. The RBI, which has raised its key lending rate by 150 basis points in six moves since mid-March, was expected to pause in its tightening cycle at least until February, but those expectations have changed in recent weeks.

However, most analysts still do not see any change in the cash reserve ratio, or the proportion of deposits that banks' need to set aside as cash with the central bank, either in January or later this year.

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