India’s economy is slowing amid global weakness and as the cumulative effects of steady rate increases exact a toll, but high inflation means the Reserve Bank of India (RBI) is expected to deliver one last rate increase on Friday before pausing in its tightening cycle.

Economists polled by Reuters said they expect the RBI to raise its key interest rate for the 12th time in 18 months on Sept. 16 before it pauses for the foreseeable future.

Wednesday's wholesale price index release showed annual inflation surged 9.78 percent in August, its highest in over a year, driven by rising prices of food and manufactured products, topping the 9.6 percent forecast in a Reuters poll.

Analysts said worsening global conditions would mean the RBI is likely to refrain from raising rates beyond Friday's expected increase, as the cumulative effects of its previous rate rises are having an increasingly visible impact.

Further rate increases could exacerbate slowing trends in factory output, bank credit, car sales, and non-oil imports, the following graphics indicate.

FALLS IN FACTORY OUTPUT, NON-OIL IMPORTS SUGGEST COOLING

Despite lumpy factory output data, the slump to a near two-year low in July raised alarm bells among market watchers.

Similarly, though overall imports continue to show growth due to energy demand, non-oil imports, which reflect capacity addition in the economy, are slowing.

BANK LENDING SLOWS AMID RISING CREDIT COSTS; CAR SALES STALL

Passenger car sales have slowed in recent months after jumping 30 percent in the fiscal year that ended in March, suggesting high inflation and rising borrowing costs are hurting consumer durables demand, threatening the broader economy.

Usually bank credit and sales of big-ticket consumer goods like cars and electronics see robust growth in the festival season between August and November, but weakness thus far this year suggests demand is subdued due to higher borrowing costs.

MANUFACTURING OUTPUT DECLINES; CAPITAL GOODS VOLATILE

The capital goods component of factory output has been volatile, leading to inconsistency in the broader indicator. However, manufacturing output has been slowing consistently, suggesting easing demand.

The HSBC Purchasing Manager's Index also showed the factory sector expanded at its slowest pace in more than two years in August as export orders shrank amid weakening global demand.

OIS CURVE INVERTS FURTHER, HERALDING SLOWDOWN

The inversion of the yield curve tends to be followed by a slowdown in the economy. India's overnight indexed swap curve inverted for the first time in late May and the spread between the 1-year and 5-year rate is currently around 91 basis points.

It recently widened to as much as 97 basis points, its highest in at least three years.

BANKS' NET CASH IN DEFICIT; INFLATION STILL HIGH

Tight cash conditions have done little to help contain inflation. The daily net liquidity position of the banking system has been consistently outside the central bank's comfort zone of plus/minus 1 percent of deposits, or 500 billion rupees ($10.5 billion).

HIGH INFLATION KEEPS REAL INTEREST RATES NEGATIVE

High inflation has been eroding the value of investments. The real interest rate in the economy based on the policy lending rate, the repo rate, minus inflation is currently around -2 percent, suggesting negative returns, and more room to raise policy rates.

One-year deposits in India pay an average of around 7 to 8 percent, meaning savers are earnings negative real returns. However, with expectations that inflation would start easing from November, real interest rates may edge back up into the positive territory.