Inflation unexpectedly fell by as much as 13 basis points to 0.7 per cent for the week ended September 26 but food prices continue to soar. Inflation is widely projected to cross 7 per cent by March 2010, and analysts expect the Reserve Bank of India (RBI) to hike interest rates and announce selective credit controls to rein in inflationary expectations.

The RBI, though, is expected to keep rates unchanged at its monetary policy review on October 27. The bond markets cooled down after the lower inflation numbers. The yield on the 10-year benchmark government bonds reduced to 7.21 per cent on Thursday, down from 7.25per cent.

On Monday, RBI governor D Subbarao said there was broad agreement for India to exit from the present excessively accommodative monetary and fiscal policies. However, he said there was less agreement on when and how we should exit.

Planning Commission deputy chairman Montek Singh Ahluwalia on Thursday said food inflation was a concern but the stimulus need to continue until the economy touched 7 per cent GDP growth. Earlier on Wednesday, finance minister Pranab Mukherjee had said India needed more time before deciding on an exit from accommodative policy and monetary and fiscal policies needed to move in tandem.

Moody’s Economy.com said the central bank may start raising key policy rates and cash reserve requirements of banks from the start of next year. The RBI could start raising its repo and reverse repo rates before end-2009 but is likely to wait till the beginning of the next calendar year.