With Reserve Bank of India (RBI) Governor Raghuram Rajan widely expected to raise interest rates for a third consecutive meeting on Wednesday, a key question is how much further it will take its battle against stubbornly-high inflation.
A Reuters poll showed 39 of 43 respondents expect the Reserve Bank of India (RBI) to lift the repo rate by a quarter percentage point to 8 per cent, after raising it by the same amount at its reviews in September and October. No respondent predicted a 50 basis points hike.
Another rate increase could further establish the hawkish credentials of RBI Governor Raghuram Rajan since his appointment in September. And if it cools inflation, a hike could aid the embattled Congress party, which is facing general elections by May, and was pounded in recent state polls, in part due to high food prices.
But another rate hike will deepen concerns about the risk that India could grow even more slowly than the decade-low annual rate of 5 percent in the fiscal year that ended in March.
The hit to growth could make continued monetary tightening unsustainable, according to analysts, increasing expectations the RBI may raise rates on Wednesday but also signal a pause, especially as wholesalers say vegetable prices - the main driver of inflation - have eased this month.
Meanwhile the U.S. Federal Reserve will soon start withdrawing its monetary stimulus, raising concerns about a possible repeat of August, when fears of Fed action sparked outflows that made the rupee plunge to a record low.
"If CPI inflation, as expected, eases in December, the RBI might pause in January and till there is a credible drop in inflation, we would expect the RBI to hold on to rates," said Saugata Bhattacharya, chief economist at Axis Bank in Mumbai.
Bhattacharya expects the RBI to raise the repo rate by 25 basis points on Wednesday.
RAJAN'S CLEAR PRIORITY
A strong indication of the RBI's intentions will come from its statement and from Rajan during a news briefing around 11:15 a.m. India time (0545 GMT).
The Reuters poll showed 22 of 29 respondents expect the RBI to hold the rate