According to Robert Prior-Wandesforde, senior Asian economist, HSBC Holdings Plc, the Indian economy may be showing early signs of overheating. Inflation has hit a two-year high since 2004 December. CNBC-TV18 reports:

He feels that the RBI may raise reverse repo rate by 25 basis points in its 31 January credit policy review and thereafter may also hike rates several more times later. The rate increase may already be largely priced in.

Some excerpts:
Should one be apprehensive and worried about what's happening in India with inflation or not quite yet?
I think you should. It seems that the Indian economy is growing very rapidly. I think we all are seeing the signs of that demand pressure coming through in stronger inflation; obviously the rise in the wholesale price index is also one indicator.

But there are several other indicators that the economy is showing early signs of overheating.

Things like very high levels of capacity, very strong credit growth, very strong housing market and along with the pick up in host of price inflation, we also had a bigger pick up in consumer price inflation as well. So I think there are somewhat worries out there that we need to start taking them more aggressively.

Looking at such inflation figures do you think the RBI's next move could be a direct rate hike and interest rates hike?
I think so. I am certainly expecting the RBI to raise the reverse repo rates by a quarter per cent at the end of the month's meetings. If I am right, I would also suspect that it won't be the last move that we see from the Reserve bank and I think we may well have several more to come basically to try and slow the economy a bit towards its more sustainable rates of growth.

You are not in the camp that believes that it looks a bit exaggerated because and the point that you made about the rate hike, is that factored in you think for the bond market here?
On the first point there is probably after special effect to see a reduction in wholesale price index. But apart from that it is more than just the wholesale price index. We have got others, which give a fairly convincing picture of an economy that is running a bit too hot at the moment.

Also within the WPI what I have noticed is that the manufacturing prices have stood and over recent months it's pretty much.

So this pressure is there in terms of whether or not the rates increase price. However in my view there are further rate hikes to come after that and they will also be fully priced in.