New Delhi, October 29:
Indiaâ€™s economy is growing by nearly nine per cent, corporate profits are strong, the stock market is setting new records and the property market is booming. Now the big question is whether the central bank will step on the brakes at its monetary policy meeting on Tuesday and raise interest rates in a bid to curb inflation, which is running at a four-month peak of 5.26 per cent. â€œDomestic factors such as rising inflation despite lower oil prices, robust bank credit and money supply growth and a strong underlying economy favour further tightening,â€ said Deepak Lalwani, a director at London stockbroker Astaire and Partners Ltd.
â€œHowever, the governmentâ€™s need to keep the economy strong and the US Fedâ€™s benign policy of keeping rates on hold for the third consecutive month favours a wait-and-see attitu-de,â€ he said. â€œItâ€™s a tough call,â€ said Lalwani, adding that his â€˜gut feelingâ€™ was that the bank would go for a 25-basis point hi-ke, if not next Tuesday, then at its next policy meet in January. The bank has hiked its leading short-term rate by 150 basis points since October 2004 to six per cent, the highest in four years, in a bid to keep a lid on prices in India, which has the second-fastest expanding big economy after China.
â€œThe bank has been raising rates and it has had no impact on growth,â€ said Crisil credit rating agencyâ€™s economist D K Joshi. India posted 8.9 per cent growth in first quarter gross domestic product (GDP) after the economy expanded by 8.4 per cent in the financial year to March 2006. The stock market is nudging record peaks and second quarter profits are up by an average of over 30 per cent. Bank credit to industry is expa-nding by over 30 per cent and property prices have risen shar-ply, sparking fears of a bubble.
â€œInflation is projected to cross six per cent in the next three months,â€ said ICICI Securities economist A Prasana. â€œTo address the issue, the Reserve Bank should hike rates.â€ The ruling Congress government would like monetary policy to spur growth in Asiaâ€™s fourth-largest economy.
It wants interest rates held as low as possible to help it attain its goal of at least 10 per cent expansion, which economists say is needed to make a significant dent in poverty in the country of 1.1 billion people. Nearly a quarter of Indiaâ€™s population live below the poverty line.
â€œThere will be an apparent difference between what I think and what the Reserve Bank of India thinks,â€ finance minister P Chidambaram said this mon-th. But if the Congress government lets inflation get too far out of hand, it will alienate its crucial electoral support base.
On Friday, official figures showed the wholesale price index, the most closely watched price barometer, had risen to 5.26 per cent, up from 4.77 per cent a year earlier. The increase was driven by rises in food prices, including maize, vegetables, eggs, soyabeans and edible oils, as well as manufactured goods. The inflation jump followed figures released this mo-nth showing a 9.7 per cent rise in Augustâ€™s industrial output.