India to maintain a tight monetary policy

MUMBAI: India's central bank is likely to keep monetary policy tight in the coming months to tame prices after the economy expanded at a faster-than-expected 9.4 percent in the year to March, analysts said.

While key interest rates, at a four-year high of 7.5 percent, may remain stable, analysts said the Reserve Bank of India (RBI) will ask banks to set aside more cash as reserves in order to cut the amount available to lend for homes, cars and other goods, in order to cool the economy and prices.

Inflation in India has declined from levels well above six percent earlier this year to a ten-month low of 5.06 percent for the week ended May 19, official data showed Friday.

But that is still above the central bank "tolerance zone" of 4.5 to 5.0 percent. "Inflation easing is largely due to the base effect," economist D.K. Joshi of rating agency Crisil told AFP.

"We expect the RBI to maintain a stance of tightening monetary policy. Growth has been strong. The bank needs to ease the demand side of prices."

The faster-than-expected growth reported last week means the central bank and the government may revise upwards forecasts of 8.5 to 9.0 percent growth for the year started April, said analysts, who have also or are ready to revise higher.

"We expect firmness in growth to continue into fiscal year 2008. If strength in credit growth and industrial production numbers is reflected in the first quarter, we could revise upwards our GDP growth forecast of 8.2 percent," said Manika Premsingh, economist with brokerage Edelweiss Capital.

India's industrial production grew a record 12.9 percent in March, from the same month a year earlier, with April data to be released this month.

(AFP)