India’s central bank raised interest rates more than expected yesterday, signalling its urgency to curb inflation, which is on track to hit double digits for the sixth month running in July.
One-year overnight interest rate swap rates jumped after the Reserve Bank of India (RBI) notched up its fourth rate rise this year and said it was “imperative” to normalize policy in line with the economy’s growth and inflation.
Before yesterday, the central bank had promised a “calibrated” exit from the loose monetary policy adopted during the global downturn, which markets had taken to mean 25 basis point rate hikes yesterday and again at quarterly reviews set for October and January.
PHOTO: REUTERS
“The dominant concern that has shaped the monetary policy stance in this review is high inflation,” the central bank said.
“With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation and anchoring inflationary expectations,” it said.
The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 percent, which was in line with expectations.
But its bumped up the reverse repo rate, used to absorb excess cash from the system, by 50 basis points to 4.5 percent. An increase of 25 basis points had been expected.
Analysts said the moves showed the central bank was trying to take more decisive action following criticism that it had acted too timidly so far to tackle rising prices that the authority acknowledged had spread beyond food to the broader economy.
“Of course, they are behind the curve on inflation,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.
“They are trying to catch the train that has left the station and they are running to accomplish that. Unfortunately, they were late to the races and this means they would have to tighten more than they would have if had they started earlier,” he said.
Reflecting the central bank’s inflation concerns, it lifted its inflation forecast for the 2010-2011 fiscal year ending March 31, to 6 percent from a previous forecast of 5.5 percent.
It said inflationary pressures had become generalized and demand side pressures were clearly evident as an economic recovery was firmly in place. It forecast GDP would rise 8.5 percent for the year through March.
Wholesale inflation, the most closely watched measure of price pressures in India, rose 10.55 percent last month from a year earlier.
A government move to free up gasoline prices and raise other fuel prices will push inflation up to about 11 percent this month, the government’s chief statistician said, marking double-digit inflation for the sixth month in a row.
Its announcement on June 25 of a fuel price hike prompted the opposition to call a one-day nationwide strike this month. Protests over rising food prices briefly shut down the Indian parliament yesterday, signalling the potential for delay in passing reforms bills.
“The clearly strong and generalized nature of inflationary pressures, coupled with improving growth conditions, have forced the central bank to act with more urgency,” said Gaurav Kapur, senior economist at Royal Bank of Scotland in Mumbai, who expects a further 50 to 75 basis points of tightening this fiscal year.
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