India is expected to hike interest rates this week for a fifth time in six months after a surge in industrial output strengthened the case for another dose of monetary tightening, economists say.
Although India has been the most aggressive in the Asia-Pacific region in raising rates to check prices, the country's inflation remains among the highest of the leading Group of 20 economic powers, at nearly 10 percent.
Economists had expected the central bank might hit the pause button on rate increases when policymakers meet this Thursday, to allow time to assess the strength of India's recovery from the global financial crisis.
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But figures late last week showing a 13.8 percent leap in industrial output in July from a year earlier -- nearly double the market forecast of 7.8 percent -- have dispelled that speculation, experts say.
"We judge that a Reserve Bank of India policy rate hike is a done deal," said Kevin Grice, international economist at London-based Capital Economics.
Production of capital goods such as machinery in Asia's third-largest economy soared a massive 63 percent, while output of consumer durables such as washing machines climbed 22 percent, the data released Friday showed.
The industrial sector "has emphatically shrugged off" the previous rate hikes, said Matt Robinson, economist at Moody's Analytics, adding that the central bank need have "little reluctance" in raising them again.
Analysts are looking for a 25-basis-point increase in the bank's repo rate, the rate at which it lends to commercial banks, and a 25-to-50 basis-point rise for the reverse repo, the rate the Reserve Bank pays to banks for deposits, and say further tightening is in store.
The benchmark rates now stand at 5.75 percent and 4.50 percent respectively, still far below historic highs.
The industrial output figures came on top of gross domestic product (GDP) data last month showing the economy grew by 8.8 percent in the quarter to March, contrasting with anaemic expansion in developed nations, which fear a double-dip recession.
India's factories are going at full tilt to meet demand in the country of 1.2 billion people, where the mainly inward-looking economy is still driven by domestic consumption.
Car sales, for instance, soared by a third in August to a record monthly high of 160,794 units from a year earlier, while bank lending to businesses and individuals is up by more than 20 percent.
"The industrial sector is running red-hot," said Frederic Neumann, co-head of Asian economics at HSBC, with demand bumping up against factory capacity restraints, raising risks of the economy overheating.
Headline inflation stands at 9.97 percent, while food inflation has crept back to a near two-month peak of 11.47 percent.
"With both industrial production and food price inflation surprising on the upside, there is little reason for the central bank to pause" in increasing rates, said Goldman Sachs economist Tushar Poddar.
The Congress-led government has been under relentless attack from the opposition over its "failure" to protect India's poorest from surging prices and now fears a voter backlash in forthcoming elections in a slew of states.
"The message for policymakers is clear: rates need to go higher" to temper inflation and avoid "an ultimate hard-landing" for the economy, HSBC's Neumann said.
