India’s central bank yesterday raised its key short-term lending rate by half a percentage point in an aggressive bid to tame inflation riding at a 13-year high, pushing shares down sharply.
Indian shares slumped 3.6 percent after the bank announced the hike in the repo rate, at which commercial banks borrow funds from the central bank, amid investor fears that the move would hit corporate profits.
The repo rate was hiked by 50 basis points to 9 percent, while the cash reserve ratio — the sum banks must keep on deposit — was increased by a quarter point to nine percent.
“Globally, inflationary pressures brought on by the elevated prices of crude, metal and some food prices show no signs of abating,” Reserve Bank of India governor Venugopal Reddy said in a statement.
“Looking forward, global and domestic factors pose severe challenges to monetary policy management and warrant reinforced policy actions,” he said.
The repo rate rise was at the higher end of analyst expectations.
The bank also cut its growth forecast for the financial year to 8 percent from 8.5 percent, saying the global economic outlook was “fraught with uncertainty.”
Asia’s third-largest economy grew by 9 percent in the last financial year to March.
“The downside risks to global economic prospects have intensified since April,” the central bank said.
Economists expect Indian growth to slow this year because of higher borrowing costs and tough global financial conditions, with some projecting expansion as low as 7 percent.
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