The Reserve bank of India (RBI) said on Monday a rise in inflation to nearly 12 percent in mid-July reflected some increase in fuel and raw material prices as well as strong demand.But an increase in state-set petroleum product prices had not kept pace with the rapid rise in global crude prices.
It also said supply side pressures on global food prices did not appear to be abating.
The RBI holds its quarterly review on Tuesday and a Reuters poll of 11 economists showed seven of them expected it to raise its key lending rate, the repo rate, by 25-50 basis points from 8.5 percent.
In its first quarter review of macro and monetary developments, the central bank said the Indian basket of crude rose by 122 percent in rupee terms between February 2007 and June 2008.
The mineral oils index rose just 27 percent in the same period, although freely priced items in the mineral oil group rose 15-104 percent.
"This suggests that pass-through in case of administered petroleum products is still incomplete," it said.
Annual inflation was 11.89 in mid-July and has more than doubled since late February to its highest since the index was made available in 1995 after the government raised state-set fuel prices in June.
The RBI raised the lending rate by 75 basis points in June in two unscheduled moves to clamp down on inflation.
It also raised the cash reserve ratio, the proportion of deposits that banks have to keep with it, by 50 basis points to 8.75 percent to absorb inflation-stoking surplus cash.
The central bank said the finances of the federal government could be pressured by higher government salaries, a cut in petroleum product duties, higher oil and fertiliser subsidies and compensating banks for waiving debts of small farmers.
The cabinet has yet to approve an increase in salaries of government employees but the move is widely expected ahead of parliamentary elections due by May 2009.
The report said a survey of professional forecasters by the RBI in June predicted the economy would expand 7.9 percent in 2008/09, lower than the previous prediction of 8.1 percent.
Asia’s third largest economy has grown at 9 percent or more over the past three years. The central bank expects it to expand 8.0-8.5 percent in the current fiscal year ending in March, which is higher than forecasts by many private sector economists.
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