RBI set to lift rates; July inflation seen up

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India should continue normalising monetary policy to rein in inflation and as the growth outlook improves, the Reserve Bank said on Monday, a day before it was expected to raise interest rates for the fourth time since March.Headline inflation in India may touch 11 percent for July, the government's chief statistician said, which would make it six straight months in double-digits and could keep pressure on the Reserve Bank to continue tightening policy in the months ahead.Markets have priced in a quarter-point increase in rates on Tuesday and are looking for cues on the future direction of monetary policy at the central bank's quarterly review.The one-year overnight indexed swap rate ended at 5.91 percent on Monday, up four basis points from Friday's close. The benchmark 10-year bond yield closed down one basis point."With receding concerns relating to the recovery and given the emerging risks of generalised inflation, monetary policy measures have to continue the calibrated normalisation process," the Reserve Bank of India (RBI) said in a report on Monday.The RBI's repeated use of "calibrated" to describe its exit from crisis-level monetary policies has been taken by markets roughly to mean increases in key rates of 25 basis points at each of its quarterly reviews for the remainder of the fiscal year."RBI is clearly making a distinction between normalisation and real tightening, and the former is not considered to be hurting growth," said R.K. Gurumurthy, head of treasury at ING Vysya Bank in Mumbai.India's central bank has increased interest rates three times since March by 25 basis points each time, most recently in a surprise off-cycle move on July 2.A Reuters poll last week found that the RBI was expected to lift the repo rate, at which it lends to banks, to 5.75 percent and the reverse repo rate, at which it absorbs excess liquidity, to 4.25 percent.TIGHT LIQUIDITYTight liquidity in the Indian banking system, as well as a sluggish global recovery, may prevent the central bank from acting more aggressively to tighten monetary policy, RBI watchers have said.Some observers have said the RBI is falling behind on managing inflation, with one-quarter of respondents in a Reuters poll saying the central bank should have acted more aggressively in recent quarters.While government officials have said wholesale price index (WPI) inflation should ease to about 6 percent in December, private sector economists put the figure closer to 8 percent. WPI inflation was 10.55 percent for June.Surging prices are politically sensitive to a government whose core constituency is mostly rural and poor. New Delhi's decision to lift fuel prices, which will boost WPI inflation by nearly 1 percentage point starting in July, prompted a nationwide strike led by the opposition early this month.Inflation in India was triggered last year by a poor monsoon that drove up food prices but has spread to the broader economy.The chief statistician of India, T.C.A. Anant, said on Monday that higher farm output and monetary tightening are needed to tame inflation, and that he expected prices to cool by November.India's food price index rose 12.47 percent in the year to July 10, against its 12.81 percent reading in the previous week.The central bank also on Monday expressed optimism on the growth outlook for 2010/11 on a better monsoon and robust industrial production, and said growth should exceed the 8 percent for the year that it had projected in April.A survey of forecasters conducted by the RBI revised the 2010/11 growth projection upwards to 8.4 percent, from 8.2 percent in the previous forecast.(Editing by Toby Chopra)(For more stories and complete coverage, click http://in.reuters.com/subjects/rbi-policy-review)
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