Lehman sees further action by RBI to check inflation

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Mumbai, July 11 (UNI) With the trade off between rising inflation and falling growth worsening, following the latest trend of slower industrial growth in May, recording a six year low of 3.8 per cent year on year from 6.2 per cent in April, the Reserve Bank was likely to continue to check the surging inflation rate by hiking rates.

Investment banker Lehman Brothers, in its latest comment on the Indian economy here, said while growth continues to weaken, much of the slowdown has been confined to the industrial sector, with service sector output still chugging along. ''Between the hard choice of rising inflation and slowing growth, we expect the RBI to choose inflation,'' it said in a release here.

Risk of second-round inflation effects, such as producers passing on higher input costs and workers demanding higher wages due to rising cost of living, were rising. To contain inflation expectations, it expected the RBI to hike the repo rate by 25 basis points on July 29, during the quarterly review along with a 50 basis points increase in cash reserve ratio.

Lehman brothers, however, did not rule out a more aggressive hike later this month. Ultimately, the only way to control supply-side inflation is by slowing demand and the May industrial report suggests that the demand slowdown might have already begun.

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