With softening economic indicators and rising inflation, Reserve Bank of India (RBI) Governor Raghuram Rajan will be faced with a tough decision at the central bank's policy meeting on Wednesday.
According to economists, Rajan will prioritize tackling inflation by lifting the benchmark policy rate by 25 basis points to 8 percent – the third rate hike in as many meetings, reversing all of the rate reductions earlier in 2013.
"The data pose the now familiar dilemma for the central bank. While the direct effect of interest rate hikes on inflation is debatable, particularly when food prices are such an important driver, we very much doubt Dr. Rajan can be seen to be sitting on his hands at this stage," Robert Prior-Wandesforde, director of Asian economics research at Credit Suisse wrote in a recent note.
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