MUMBAI: India's central bank was expected to make its second successive interest rate hike on Tuesday after saying that inflation remains uncomfortably high.
Economists predicted that the Reserve Bank of India (RBI) would raise the repo rate -- at which it lends money to commercial banks -- by 25 basis points to 7.75 percent at its monetary policy meeting in Mumbai.
"We expect the RBI governor to be relentless in his pursuit of inflation management," said Shubhada Rao, chief economist with private Yes Bank.
The new RBI governor Raghuram Rajan -- who had warned he was prepared to take unpopular steps to bring the economy back on track -- surprised markets by hiking interest rates in September.
Despite improvements in investor sentiment and a strengthening of the rupee since he took charge, another rate hike was expected Tuesday in the face of wholesale inflation figures, which have been above 5.0 percent for four successive months.
"Various surveys, including those by the RBI show that business confidence remains weak, while inflation expectations have risen again," the central bank said in its macroeconomic report on Monday night.
"The monetary policy will need to aim at anchoring inflation expectations, while appropriately addressing growth risks," it added, describing inflation as "above comfort levels".
India's annual inflation jumped to a seven-month-high of 6.46 percent for the month of September, led by surging food and fuel prices.
"Inflation remains a big worry at this stage," said local ratings agency Crisil's chief economist D.K. Joshi, expecting a similar hike in rates.
The bank is due to announce its policy at 11:00 am (0530 GMT).
India grew by 4.4 percent in the April to June quarter, the slowest quarterly expansion in four years, and business leaders have for long been seeking a cut in rates to help revive sluggish domestic growth.
The RBI said it expects "a modest improvement in growth" in the second half of the fiscal year to March 2013 "on the back of a good monsoon and some improvements in industrial growth".
Huge expectations have been riding on Rajan, a former International Monetary Fund chief economist nicknamed "The Guv", since he came to office in a period of economic turmoil.
The rupee has gained ground from record lows since he took charge and announced steps to increase foreign capital flows into the country and bolster foreign exchange reserves.
The scandal-tainted Congress-led government of Prime Minister Manmohan Singh is anxious to tame inflation and revive the economy as it seeks a third term in office, with elections due by May 2014.
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