India's tightening cycle looks nearly over

The Reserve Bank of India (RBI) will probably lift its two policy rates by another 25bp this week. Inflation remains too high while the economic upswing, although losing some momentum, is likely to stay generally strong. Nevertheless, the end of the tightening cycle is now close. Annual inflation should slow sharply in coming months, we forecast to 5-6% by March 2011 from 8.6% currently, as good harvests lower food costs. In addition, higher investment looks set to finally lift capacity in the economy and curb demand-side price pressures. The repo rate will probably peak at 6.5% by end-2010, which compares to 6.0% now.