April 28 (Bloomberg) -- Economists are divided on whether India's central bank will raise interest rates to slow inflation after it ordered lenders to set aside more money two weeks ago to check prices.

The Reserve Bank of India may leave its benchmark repurchase rate unchanged at 7.75 percent, according to 9 of 20 economists surveyed by Bloomberg News. The remaining 11 expect an increase to 8 percent.

Raising interest rates too much could hurt economic growth, forecast by Finance Minister Palaniappan Chidambaram to be the weakest this year since 2005. Governor Yaga Venugopal Reddy said last month the central bank is facing ``policy dilemmas'' balancing inflation and sustaining expansion in a country facing elections in a year.

``The central bank may want to see the impact of recent fiscal and monetary measures on inflation before taking any further action,'' said Shuchita Mehta, senior economist at Standard Chartered Bank in Mumbai. ``Hiking rates now could lead to a further deceleration in growth.''

The Reserve Bank, which raised the ratio of deposits that commercial lenders must put aside by 50 basis points to 8 percent on April 17, will announce its quarterly monetary policy at noon tomorrow in Mumbai.

India's benchmark 10-year bond fell today on concern record crude oil prices will accelerate inflation. It's yield rose to 8.16 percent at 9:10 a.m. in Mumbai from 8.15 percent April 25.

Global Slowdown

Inflation in India was 7.33 percent in the week ended April 12, near the highest in more than three years and exceeding the central bank's 5 percent forecast for the year ended March. Chidambaram expects a global slowdown to drag India's expansion to about 8 percent in the current financial year, less than the record average pace of 8.7 percent in the previous five years.

``On top of slowing economic growth, we see another reason for the Reserve Bank not to overreact to supply-side driven inflation,'' said Sonal Varma, a Mumbai-based economist at Lehman Brothers LLC. ``Higher interest rates could further widen the interest rate differential with the U.S., which could attract strong capital inflows.''

The spread between two-year Indian government bonds and similar maturity U.S. Treasury notes has doubled to 5.52 percent since July as the Federal Reserve slashed rates.

The rupee, which gained 12.3 percent in 2007, has declined 1.8 percent this year on concern cooling global growth would hurt India's economy.

Inflation in India's $912 billion economy, Asia's third- biggest, is accelerating mainly on account of food and some manufactured products such as steel and cement.

Crops Depleted

India expects to harvest record crops in the year to June 30. Still, demand from India's 1.1 billion people, more than half of whom are below the age of 35, exceeds supplies that have been depleted by poor warehousing. About 10 percent of the farm output is either wasted or eaten by pests, the government says.

To meet current shortages, the government in the past month has scrapped import taxes on edible oils and maize and banned export of rice, pulses and cement. Prime Minister Manmohan Singh has also extracted assurances from steel and cement makers not to raise prices.

India's central bank, like the People's Bank of China, has been relying on raising the cash reserve ratio, or the proportion of deposits lenders must place with it, to reduce money supply and slow inflation.

The Reserve Bank of India has raised the reserve ratio six times since December 2006 to a seven-year high. China this month raised the ratio for the third time this year to a record 16 percent. The Reserve Bank has kept its key repurchase rate, or the overnight lending rate, unchanged at 7.75 percent in the past year.

Bond Yields

``At present, the nature of inflation in the economy is supply-side driven,'' said Venugopal N. Dhoot, president of the Associated Chambers of Commerce and Industry. ``Monetary tightening measures would rather hurt other economic segments like real estates, consumer durables and automobiles.''

Uncertainty over the central bank's action in tomorrow's monetary policy meeting has kept the yield on the benchmark 10- year bond almost unchanged since April 21.

``Given the huge political importance of inflation and the big gap between current inflation and the central bank's preferred ceiling, we expect the Reserve Bank will continue its tightening measures,'' said Tushar Poddar, an economist at Goldman Sachs Group Inc.

India's Rate Forecasts

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                                                         Cash
                                            Reverse   Reserve
Company                         Repo Rate      Repo     Ratio
---------------------------------------------------------------
Median                               8.00%     6.00%     8.00%
% estimates at Median               55.00%    90.00%    95.00%
High                                 8.00%     6.25%     8.50%
Low                                  7.75%     6.00%     8.00%
Number of Estimates                    20        20        20
---------------------------------------------------------------
ABN Amro Bank                        8.00%     6.00%     8.00%
Anand Rathi Securities               7.75%     6.00%     8.00%
Bank of America                      8.00%     6.00%     8.00%
CARE Ratings                         7.75%     6.00%     8.50%
CRISIL Ltd.                          7.75%     6.00%     8.00%
DBS Group                            8.00%     6.25%     8.00%
Edelweiss Securities                 8.00%     6.00%     8.00%
Forecast Singapore                   8.00%     6.00%     8.00%
Goldman Sachs                        8.00%     6.00%     8.00%
HSBC                                 8.00%     6.00%     8.00%
IDBI Gilts Ltd.                      8.00%     6.00%     8.00%
ING Vysya Bank                       8.00%     6.00%     8.00%
Inst. of Economic Growth             7.75%     6.00%     8.00%
JPMorgan Chase Bank                  7.75%     6.00%     8.00%
Kotak Mahindra Bank                  7.75%     6.00%     8.00%
Lehman Brothers                      7.75%     6.00%     8.00%
Merrill Lynch                        8.00%     6.00%     8.00%
Standard Chartered Bank              7.75%     6.00%     8.00%
Westpac Banking                      7.75%     6.00%     8.00%
Yes Bank                             8.00%     6.25%     8.00%
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To contact the reporter on this story: Cherian Thomas in Mumbai at cthomas1@bloomberg.net.

Last Updated: April 28, 2008 00:40 EDT