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Inflation Rises, RBI Response Seen

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With higher fuel prices seen sending inflation to a 13-year peak early next month, analysts expect Reserve Bank of India to take action soon to ease price pressures.

RBI Governor Y.V. Reddy said on Thursday the central bank was ready to employ the full range of instruments at its disposal to turn round inflation.

India's widely watched wholesale price inflation rate rose 8.24 percent in the 12 months to May 24, above the previous week's level of 8.10 percent but slightly below a median forecast in a Reuters poll of 8.29 percent.

"Inflation remains high and needs to be tackled. We believe the Reserve Bank of India may hike the reverse repo and the repo rate by 25 basis points by July," Shuchita Mehta, economist at Standard Chartered Bank in Mumbai, said.

Revisions to earlier data have been sharp in the past few weeks, but Friday's figures showed this trend slowed in the week ended March 29, with inflation now at a revised 7.75 percent, up from 7.41 percent.

That is way above the 5-5.5 percent the central bank had set as its comfort level for the 2007/08 financial year ending in March.

After 10 days of debate, the communist-backed ruling coalition on Wednesday agreed to raise state-set petrol and diesel prices by about 10 percent, more than expected, to help curb losses at its state-owned refiners.

Energy costs account for 14.2 percent of the inflation index, and the price increases will have a cascading impact on overall prices as diesel and petrol are key inputs through the economy.

A Reuters poll of analysts found the immediate impact of the fuel price rises would be to push wholesale price inflation to a 13-year high of 9.2 percent on June 7.

Finance Minister P. Chidambaram, while admitting that inflation was a problem due to higher global crude prices, said the government was willing to take more measures to calm prices.

Some analysts said the central bank may only use the reserve requirement route to tame inflation, fearing any hike in rates would further hurt growth already seen moderating to a still strong 8-8.5 percent this fiscal year from 9 percent in 2007/08.

Markets were largely unchanged from before the data's release with the 10-year bond yield steady at 8.23 percent and the rupee at 42.80/81 to a dollar.

"Our view remains that the RBI will tighten monetary policy using cash reserve ratio hikes, (and) we expect another 100 basis points worth of CRR hikes this year," said Sonal Verma, an economist at Lehman Brothers in Mumbai.