Read the following report on Indian economy and answer the questions at the end.

[This is only intended to be a specimen]

Indian bonds signal July interest rate rise is on the cards

July 13 (Reuters) - Investors in Indian federal bonds are pricing in a quarter percentage point increase in the short-term interest rate this month, concerned surging domestic demand and costlier oil may boost inflation, analysts said !he yield curve has steepened in the past t"o "ee#s, "ith the spread bet"een the one-year and 1$-year bond "idening to 1%% basis points from 11$, indicating long-term inflationary e&pectations are building in the economy !he '($$-billion economy, )sia*s third largest, is e&pected to maintain gro"th of ( percent in the current fiscal year that ends in +arch ,$$-, having averaged ( ( percent in the past t"o years ./iven the underlying momentum of demand in the economy is strong, it is probable that a rise in oil prices "ill be passed on in product and services prices to a significant e&tent,. said 0an1eet 0ingh, economist at I2I2I 0ecurities .In such an environment, policy ma#ers "ould be biased to"ard raising interest rates to contain inflationary e&pectations . 3vidence pointing to increased inflationary pressures seems to be stac#ing up International oil prices hit a fresh record above '-, a barrel last "ee# and India*s industrial output gro"th is running at its fastest pace in nine years 3arly concerns that the June-0eptember monsoon "ould be "ea# -- prompting analysts in June to say the central ban# "ould not raise rates at its July ,- revie" -- have been "iped a"ay on gro"ing signs the rainy season "ill, in fact, be normal ) normal monsoon "ould underpin rural incomes and cement economic gro"th e&pectations 4il prices have gained more than 1$ percent since the central ban# last raised the shortterm rate ,5 basis points to 5 $ percent in )pril -- a move that "as also aimed at containing oil-fired inflation !he rate, #no"n as the reverse repo rate, is used to price short-term loans !he ban# rate, used to price longer-term loans, has been at - $ percent since )pril ,$$3 )nalysts say policy ma#ers are li#ely to "ait to see ho" the monsoon "or#s out before considering a rise in that rate in 4ctober India*s 1-year treasury bill is yielding 5 6$ percent "hile the 1$-year bond has been returning around ( ,% percent this "ee#, the highest in , months INF !TI"N #R$$% 7uel comprises 1% , percent of the "holesale price inde& (89I), India*s most closely "atched inflation gauge, so this is li#ely to be a significant factor in central ban# deliberations !he central ban# estimates every dollar increase in crude, the country*s biggest import, pushes the 89I up 3$ basis points !he "holesale inflation rate is currently around % percent, do"n from 5 percent in )pril, but analysts say the fall "ill prove temporary .)s the base effects recede and domestic demand pressures intensify, inflation is li#ely to creep bac# up to nearer - percent to"ards the end of financial year ,$$5:$-,. 0tandard 2hartered ;an# said in a research report this "ee#

It e&pects inflation to average 5 percent to 5 5 percent in the financial year to the end of ne&t +arch .8e maintain our vie" that the tightening cycle in India is not over yet,. the ban# said &TR"N' (!T!) TI'*T$R I+,I(IT+ay*s industrial output rose a si<<ling 1$ 6 percent from a year earlier, pic#ing up sharply from )pril*s gro"th Industrial output accounts for a quarter of India*s gross domestic product and the data tallies "ith a surge in demand for ban# loans, "hich "ere about 3$ percent higher in June than a year earlier, as companies invest in capacity to meet demand !he pace of activity is li#ely to continue if the monsoon is normal this year =ealthy crops "ould boost rural incomes and demand, a #ey factor in economic gro"th since nearly t"o thirds of India*s one billion population live on the land )nalysts say the central ban# has also reined in high liquidity, possibly to manage inflation, by refraining from rupee intervention and allo"ing the currency to be nearly 1$ percent overvalued on a trade-"eighted basis, "hich is unusual but "hich helps curb oil-led inflation >eutsche ;an# said in a report this "ee# gro"th in the central ban#*s net foreign e&change assets, the foreign currencies it holds and built through intervention, has no" slo"ed to 6 3 percent year-on-year from 1- percent in early +ay, as the central ban# has stayed a"ay from intervening )nalysts say "hile a drop of nearly 3$$-billion rupees ('- ? billion) of e&cess funds in the ban#ing system since early +ay is a sign of tighter conditions, the central ban#*s ne&t step "ould be raising domestic rates to rein in inflation e&pectations