India hiked key interest rates by a quarter point yesterday — its eighth hike in a year — as rising oil prices threaten to aggravate inflation in Asia’s third-largest economy.
The Reserve Bank of India also raised its inflation forecast for the year from 7 percent to 8 percent on high crude prices and rising manufacturing costs.
“The underlying inflationary pressures have accentuated, even as risks to growth are emerging,” the bank said.
As expected, the central bank raised the repo rate — at which it makes short-term loans to commercial banks — from 6.5 percent to 6.75 percent with immediate effect. It raised the reverse repo rate — at which it borrows from commercial banks — by 5.5 percent to 5.75 percent.
The Reserve Bank of India said it’s too early to assess the impact of the natural disaster in Japan on India’s economy, but warned that a turn from nuclear energy could exert further upward pressure on petroleum prices.
The central bank said India is on track to clock 8.6 percent growth this year, but cautioned that uncertain commodity prices could dampen the investment climate.
“Investment momentum may be slowing down,” the bank said, adding that its current anti-inflationary stance is likely to continue.
Rising prices, along with a crush of corruption scandals, have battered India’s ruling Congress Party coalition, spurring street protests in some places.
India’s latest inflation data — 8.3 percent for last month — took many by surprise and topped the bank’s own inflation forecasts by more than a percentage point.
“It’s no longer a food inflation problem,” HDFC Bank chief economist Abheek Barua said. “The economy seems to be showing signs of overheating.”
India imports about three-quarters of its oil and the government pays hefty subsidies on fuel. That means rising oil prices threaten to wreak havoc not just with inflation, but also with India’s current account and large fiscal deficit.