India's central bank set to raise rates again

India's central bank was on Tuesday expected to hike interest rates for the 13th time since March last year in a bid to tame high inflation, despite a slowdown in Asia's third-largest economy. Economists forecast policymakers at the Reserve Bank of India (RBI) would raise short-term interest rates by 25 basis points when they announce a decision in Mumbai at 11:00 am (0530 GMT). The benchmark repurchase or repo rate, at which the RBI lends to commercial banks, is currently at 8.25 percent -- its highest level in nearly three years. The reverse repo -- paid to banks for deposits -- is at an over-a-decade high of 7.25 percent. India's business leaders have repeatedly called for a halt in the tightening, saying it has pulled down growth. The dozen rate rises have driven up borrowing costs and dampened demand, while a faltering US recovery and the eurozone debt crisis have cast doubts over a global recovery. But the prospects of a rate hike look inevitable, as annual inflation -- 9.72 percent in September -- is well above the RBI's comfort zone of six percent. Food inflation climbed back to double digits at 10.6 percent last week, driven by soaring vegetable prices and the RBI itself said Monday that risks of inflation "still prevail", calling it "sticky". The bank's statement was taken as an indication of a fresh hike. "Despite best efforts, inflation is very much there and elevated," said Siddhartha Sanyal, chief India economist with Barclays Capital. Shubhada Rao, chief economist at the private Yes Bank, expected a hike in rates, but wished the RBI would pause. She said that while 12 rounds of tightening had not yet brought price rises under control the RBI "does not want India to be seen as an economy entrenched with an over nine percent inflation". Finance Minister Pranab Mukherjee insisted last week that India's economic fundamentals were still strong but added: "Dark clouds have gathered in the global scenario, casting a shadow on us." The government now projects growth of nearly eight percent in the financial year to March 2012, down from an initial nine percent forecast and after the economy expanded by 8.5 percent last year. But investment houses are more pessimistic, with most forecasting growth of just over seven percent. The RBI's problems have also been compounded by a weakening rupee, which raises inflationary pressures by driving up the cost of imports such as oil, metals, fertilisers and food staples such as pulses. The rupee breached the level of 50 to the dollar last week. India's government, reeling under the impact of a slew of corruption scandals, desperately wants to keep the cost of living down, fearing a voter backlash in key state elections next year. Another rate hike would further isolate India's central bank from its peers, most of which have shifted focus from fighting inflation to promoting growth as global financial turmoil begins to curb economic expansion. RBI governor Duvvuri Subbarao has said he is "deeply sensitive" about making India a low-interest regime but doing so would take time. "First, we need to bring inflation down in order to bring interest rates down," he said at an RBI meeting earlier this month.