Wed, Jul 27, 2011 - Page 10 News List

India increases key rates by 50 points to combat inflation

SURPRISE:Most analysts were forecasting a 25-point increase, while business leaders fretted that rising credit costs could affect spending


India’s central bank yesterday raised interest rates by a higher-than-expected 50 basis points, its 11th increase since March last year as it struggles to combat near double-digit inflation.

After a meeting in Mumbai, Reserve Bank of India (RBI) Governor Duvvuri Subbarao said a hike was necessary because of rising inflation stoked by higher fuel prices and manufacturing costs.

“Although the impact of past monetary policy actions is still getting transmitted, considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance,” he said.

India has the highest inflation of any major world economy except for Russia, rising 9.44 percent last month from a year ago, compared with 9.06 percent in May.

The central bank has expressed concern that inflation has spread from the food sector into the rest of the economy, leading to rising wages and a danger of a damaging price spiral.

“If RBI wants to be seen as an inflation fighter, it cannot stop hiking interest rates,” said Ritika Mankar, an economist with the research firm Ambit Capital in Mumbai.

After the hikes yesterday, the RBI’s repo rate (the rate it lends to commercial banks) stands at 8 percent and its reverse repo (the rate it pays banks for deposits) is at 7 percent.

The repo rate is now near a three-year high and the reverse repo is at its highest level in more than a decade, analysts said.

Indian shares tumbled after the decision, with the benchmark Sensex 30 closing down 1.29 percent yesterday, reflecting concerns that economic growth would slow.

Business leaders have called for a halt to the rises, amid fears that the rising cost of credit — and a lack of economic reforms — could hit further spending by consumers and investment. Subbarao said the RBI now expected inflation to be around 7 percent at the end of the fiscal year in March, compared with its prior estimate of 6 percent.

He warned that “inflation could remain elevated for a few months before moderating” toward the latter part of the year.

Most economists, who had predicted a quarter-point rise, were surprised by the sharper hike in rates and warned that India’s economic growth this fiscal year could slow further, possibly to below 8 percent.

“The hike was much sharper than expected,” said Siddhartha Sanyal, chief India economist with Barclays Capital. “An 8.0 percent growth now looks difficult to achieve.”

The government has revised down its growth forecast from 9.0 percent to 8.6 percent for the current fiscal year because of what it called a “perceptible slowdown” in the past two financial quarters.

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