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Inflation spreading, RBI may hike rates "any time" - official

NEW DELHI (Reuters) - Inflation in India is spreading and the Reserve Bank of India (RBI) could raise interest rates before its scheduled policy review late next month to tame high prices, a top government official said on Wednesday.

A vendor arranges vegetables at a market in Jammu August 12, 2009. Inflation in India is spreading and the Reserve Bank of India (RBI) could raise interest rates before its scheduled policy review late next month to tame high prices, a top government official said on Wednesday. REUTERS/Mukesh Gupta/Files

The central government’s chief statistician Pronab Sen said core inflation “is now starting to get worrying,” with price pressures becoming more pervasive.

“We are seeing it (inflation) happen in non-agricultural products. That is one area of worry that has to be tackled,” he told reporters.

When asked whether the Reserve Bank of India could opt for a rate hike before its July 27 review, Sen said the Reserve Bank could raise rates “any time.”

Speculation that the RBI would raise policy rates before its July review have been mounting after headline inflation rose to a higher-than-expected 10.16 percent in May, the highest rate in the G20 group of leading economies.

Markets are divided over whether the central bank will move ahead of the review although most analysts surveyed by Reuters expect the RBI to wait until July 27 due to liquidity concerns.

The RBI has raised policy rates twice this year by a total of 50 basis points in March and April. Analysts in the Reuters poll expect the central bank to raise them by another 50 basis points by the end of the year.

The repo rate, at which it lends to banks, now stands at 5.25 percent and reverse repo rate, at which it absorbs excess cash from the banking system, is at 3.75 percent.

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JUNE INFLATION SEEN BELOW 10 PCT

Sen, who is scheduled to soon join the government’s influential planning body as an adviser, said headline inflation could dip below 10 percent in June because of a weakening base effect.

Markets showed little reaction to his remarks on Wednesday.

“There was no reaction, the market is probably getting used to too much of statements these days,” said a trader in Mumbai.

Finance Minister Pranab Mukherjee told Reuters Television in Washington on Tuesday he was concerned about double digit inflation but believes it can be tamed by a strong harvest and increased output of key food items.

Policymakers have consistently missed their own predictions on headline inflation. The Reserve Bank had predicted 8.5 percent inflation for March, which then turned out to be more than 11 percent.

High prices have emerged as a policy headache for Prime Minister Manmohan Singh’s government in a country with hundreds of millions of poor, and may have dampened a drive for economic reforms such as hiking retail fuel prices.

Mukherjee told Reuters Television the central bank was prepared to act to control inflation “as and when considered necessary.”

He added that headline inflation can fall to a rate of about 4.5 to 5 percent by the end of the current fiscal year in March 2011 on increased food supplies such as sugar and oilseeds after monsoon rains.

(Additional reporting by Umesh Desai in Hong Kong; Writing by Matthias Williams; Editing by Alistair Scrutton & Kazunori Takada)

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