India's central bank is expected to raise policy interest rates for the second time in as many months on Tuesday to fight stubbornly high inflation, while rolling back further emergency measures put in place recently to support the slumping rupee.Rupee vs. U.S. Dollar
Despite the risks to an already sluggish economy, the Reserve Bank of India (RBI) is forecast to lift its policy repo rate by 25 basis points (bps) to 7.75 percent, according to 29 of 41 economists polled by Reuters.
"Given that food price inflation is at a 38-month high, there is a risk that it could spread to generalized inflation expectations," said Samiran Chakraborty, head of research at Standard Chartered in Mumbai.
Annual food inflation accelerated to 18.4 percent in September, its highest since mid-2010, pushed up by prices of vegetables including onions and stirring public discontent ahead of national elections which must be held by next May.
While the central bank looks set to raise its repo rate, it is likely to cushion the blow to credit markets by further unwinding liquidity tightening measures implemented this summer as it struggled to shore up the tumbling rupee.
The rupee slumped to record lows in August, at one point sliding some 20 percent for the year, on concerns about the country's gaping current account and fiscal deficits, and as global investors dumped emerging market assets for fear the U.S. Federal Reserve was set to start tapering its massive stimulus program.
The RBI had jacked up the MSF by 200 bps in July as the rupee sagged. It rolled back 75 bps of that at its September 20 review and another 50 bps earlier this month. The combination of a repo increase and further MSF cuts would restore the gap between the two rates to its usual 100 bps.
The rupee closed on Monday at 61.52 to the dollar, down 10.6 percent on the year, after stabilizing in recent months on the back of India's support measures as well as the delay in the Fed's expected winding-down of its stimulus.
"The strategy will be to continue on the path of dismantling the extraordinary measures taken during the rupee crisis. I don't think he (Rajan) will be ultra-hawkish and will emphasize that growth is a concern and that also needs to be tackled," said Abheek Barua, chief economist at HDFC Bank.
The headline wholesale price index (WPI) unexpectedly hit a seven-month high in September of 6.46 percent as food prices surged, while the consumer price index jumped an annual 9.84 percent, spurring expectations for another rate hike.
Pause Before Rupee Collapse?
With consumer prices rising at nearly 10% annualized, and food inflation over 18%, a hike to 7.75% is hardly tight economic policy. Moreover, India's property and stock market bubbles are both still going strong.
Supposedly the RBI wants to maintain "growth". But what growth is that? Supposedly real growth takes into account inflation, but I am hard pressed to believe it.
Regardless, this dam may be about ready to collapse, even if India's stock market hits new highs in nominal terms.
Mike "Mish" Shedlock