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Mumbai: Stock investors in India will be focused this week on the central bank, which is expected to stick to its hawkish stance when it reviews monetary policy on Tuesday to calm stubbornly high inflation.
The Reserve Bank of India (RBI) had raised its key lending rate by 75 basis points and the deposits that commercial banks must keep in reserve by half percentage point in June to slow down demand for loans and ease the price spiral.
The moves have pushed up borrowing costs and crimped consumer spending, but inflation in mid-July remained at near 12 per cent, the highest since the current series of readings began in 1995.
The government, which won a confidence vote in parliament last week, has said its top priority is to cool inflation - a major issue with people across the country ahead of national elections due by May next year.
Critical issue
"The credit policy is the critical issue before the market," said Biju Dominic, who advises retail investors in Mumbai.
"If the RBI tightens policy again, it will cause unease."
Already higher interest rates have pinched makers of automobiles and consumer goods, and property developers are facing a big slowdown in activity.
Like all central banks, the RBI would probably want to target inflation, analysts said.
"In order to reinforce its stance and to keep inflation expectations in check, the RBI is likely to hike the repo rate by 25 basis points in next week's policy review," A Prasanna, economist at ICICI Securities, told a news agency.
But the government will be under pressure to ensure this does not severely dent economic growth.
A sharp economic downturn can hit government revenue and worsen the fiscal condition - a situation that would trigger downgrades by world rating agencies.
"The RBI will have to do a fine balancing act," said equity trader Kevin D'Souza.
"I don't think it will want to dampen sentiment just when the market seemed set to come off a bear hug," he said.
The top-30 Sensex got a shot in the arm last week after Prime Minister Manmohan Singh's minority coalition won the support of regional and small groups to score a convincing victory in the trust vote.
The win cleared the way for forging a civilian nuclear tie-up with the United States, and the government was quick to underline it would now kick off reforms such as divestment, more foreign investment limits in banks and insurance.
Good tidings
For the first time in more than four years of its five-year term, the government will not have to depend on the communists who had opposed all reforms.
Investors saw this as good tidings and drove the Sensex up 4.7 per cent last week to 14,274.94 points, its biggest weekly rise in several months.
Financial shares that had been badly mauled by the bears were among the biggest gainers as the reform push was seen as benefiting them.
D'Souza said the sharp fall in oil prices from record highs above $147 a barrel should help tame inflation pressures across the world, particularly for India which imports 70 per cent of its oil.
However, an erratic monsoon is a worry. On Thursday, the weather department said rains were 33 per cent below normal in the past week, but are likely to revive in the worst-hit western and southern regions.
- The writer is a journalist based in India.
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