India's central bank likely to raise rates Thursday

Industry has been clamouring for holding off another rate hike, saying that further monetary tightening would affect capacity building and output. In a letter to the RBI Governonr, chairman of the corporate finance committee of FICCI, Udayan Bose, said: "This is largely a problem arising out of demand supply mismatch, any move to control such inflation through monetary moves has been futile. On the contrary, aggressive monetary tightening is having an adverse bearing on economic and industrial growth of the country," he added.

The RBI had hiked the repo rate by 50 basis points on May 3 to 7.25 percent and said that henceforth, the reverse-repo rate would always be pegged at 100 basis points below it. This was the ninth time in 15 months that the policy rates were raised.

Most analysts expect at least a 25 basis point hike in the repo this time around. Taming high inflation has been the key concern of the central bank. It has maintained that it would continue to adopt a hawkish tone till as such time inflation does not fall to manageable levels and would not mind sacrificing growth in the short-term.

The latest data released Tuesday by the commerce and industry ministry showed inflation, as measured by the wholesale price index, at 9.06 percent in May, much higher than 8.66 percent in the previous month.

The inflation figures for March were revised upwards to 9.68 percent from the previously estimated 9.04 percent. On the other hand, the country's industrial output has slowed down, which India Inc says is a result of persistent rate hikes by the RBI.

As per the new series of computing the index of industrial production, India's factory output came in at a much slower 6.3 percent in April compared to 13.1 percent in the like month of 2010.

Urging the RBI to not rate hikes again, FICCI said: "Inflation is no longer confined to food articles alone and has become more generalised. However, the inflationary pressure emanating from manufactured products has less to do with demand side pressures and is largely the result of rising input costs. And for addressing this, we need creation of more capacities in all segments encompassing industrial raw materials."

"Unfortunately, a tight monetary policy also hits at this very objective - limiting capacity addition at a time we need it most.”