India’s central bank raised interest rates yesterday by 25 basis points, as expected, to clamp down on resurgent inflation, saying higher food prices could become entrenched if steps to boost output are not taken.
Even though the Reserve Bank of India (RBI) has raised its policy rates seven times since March, it said that the balance of risks had tilted toward stronger inflation and it stood ready to respond if price pressures increased.
The RBI raised its repo rate — the rate at which it lends to banks — to 6.5 percent from 6.25 percent and it lifted its reverse repo rate — the rate at which it borrows from banks — to 5.5 percent from 5.25 percent.
Economists in a Reuters poll had forecast the central bank would raise the rates by a quarter point yesterday and by 75 basis points throughout the course of this year.
The central bank is trying to balance the need to prevent food prices, which the UN’s food agency says are at a -record-high globally, from spreading to broader inflation, while keeping economic growth near 9 percent.
Several government ministers have made it clear they are not in favor of aggressive tightening of monetary policy, fearful than any impact on growth could hit their political support ahead of a series of state elections that, if lost, could damage the governing coalition.
“As high food inflation persists, the prospect of it spilling over to the general inflation process is rapidly becoming a reality,” Reserve Bank of India Governor Duvvuri Subbarao said in the policy document.
“Unless meaningful output enhancing measures are taken, the risks of food inflation -becoming entrenched loom large and threaten both the sustainability of the current growth momentum and the realization of its benefits by a large number of households,” Subbarao said.
The wholesale price index , the most widely watched inflation gauge in India, rose 8.43 percent last month from a year earlier, compared with 7.48 percent in November last year.
The RBI yesterday lifted its headline inflation projection for March to 7 percent from 5.5 percent previously, and said it expected inflation to begin moderating again in the first quarter of the 2011 fiscal year, which starts in April.
The RBI’s perceived comfort zone for inflation is 5 percent to 6 percent in the short term and 3 percent to 4 percent in the medium term.
The central bank stuck with its 8.5 percent economic growth forecast for the 2010 fiscal year, but with an upside bias.
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