MUMBAI (Reuters) - India's economy is beginning to show signs of slowing despite inflation that is racing well above the Reserve Bank of India's (RBI) comfort zone, putting policymakers in a tight spot over the extent of further interest rate increases.
Economists and traders expect another 50-75 basis points in rate hikes before the RBI pauses in its tightening cycle late this year.
Tuesday's wholesale price index inflation reading of 9.06 percent for May, well above expectations, adds to the likelihood that the RBI will raise rates at its mid-quarter review on Thursday.
The path afterwards is less clear as other indicators point to a weakening near-term outlook for the domestic economy and worsening global conditions, though strong monsoon rains could boost agricultural output and ease pressure on food prices.
Trends in industrial production, exports, imports and credit growth suggest the central bank must assess carefully the impact of its actions so far before tightening further.
FACTORY OUTPUT, EXPORTS, IMPORTS SUGGEST COOLING
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Weaker growth in industrial output, exports and import demand suggest Asia's third-largest economy is cooling.
Industrial output rose in April at its slowest annual pace in 3 months at just 6.3 percent, down from an 8.8 percent rise in March and far below the double-digit growth seen last year.
India's exports and imports are also beginning to slow, and worsening conditions in the United States and Europe could hurt orders in coming months, weighing on domestic growth.
CAR SALES EASE; INFLATION, BORROWING COSTS WEIGH
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Passenger car sales growth has started to drop, suggesting high inflation and rising borrowing costs are beginning to hurt the consumer durables segment, potentially threatening the broader economy.
RISING BORROWING COSTS CRIMP BANK CREDIT
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Rising interest rates are deterring consumers and companies from borrowing, slowing credit expansion in the economy.
A sustained contraction of bank credit could hinder growth, though bank credit continues to stay above the central bank's projection of 19 percent for the current fiscal year.
OIS CURVE INVERTS; SUGGESTS POSSIBLE SLOWDOWN
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The inversion of the yield curve tends to be followed by a slowdown in the economy. India's OIS curve inverted for the first time in late May and the spread between the 1-year and 5-year rate is currently around -20 basis points, its highest in more than two and half years.
BANKS NET CASH IN DEFICIT; INFLATION STILL HIGH
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Tight cash conditions have done little to help contain inflation. The daily net liquidity position of the banking system has been consistently above the central bank's comfort zone of plus/minus 1 percent of deposits, or 500 billion rupees ($11.2 billion).
($1 = 44.8 Rupees)...
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