India hikes two short-term rates

AP , MUMBAI, INDIA

Wed, Jul 26, 2006 - Page 10

India's central bank raised two trend-setting short-term interest rates yesterday by a quarter point each, but left a key rate unchanged in a bid to sustain the growing economy's momentum.

Unveiling its quarterly monetary policy, the Reserve Bank of India raised its overnight borrowing rate to 6 percent and its repurchase rate to 7 percent, effective immediately.

The moves, the third hike in the two rates this year, are aimed at curbing inflationary pressures amid rising oil prices.

But the longer term bank rate -- the rate at which the central bank lends to commercial banks in the country -- was left unchanged at 6 percent, an indication that inflation is expected to stay within manageable limits. The Reserve Bank also kept the cash reserve ratio unchanged at 5 percent.

Indian government bonds fell as traders sold securities in anticipation that future issues would fetch higher returns.

Analysts said the hike in short-term interest rates would have little impact on the broader economy.

It is "a pre-emptive move to rein in inflation that will not hurt the economy much," said D.K. Joshi, an economist at the credit rating agency CRISIL Ltd.

The central bank said it expected inflation in the fiscal year ending in March 2007 to average between 5 percent and 5.5 percent. It projected GDP growth this year of 7.5 percent to 8 percent.

"Our current assessment points to the domestic economy exhibiting strong fundamentals and displaying considerable resilience," the Reserve Bank statement aid.

India's economy has averaged 8.1 percent growth annually in the past three years -- the fastest after China among the world's major economies.

The central bank, however, warned against rising international crude prices, saying its impact on the domestic economy could be more than what has been expected. India imports nearly 75 percent of the crude oil it processes.

The benchmark wholesale price index rose 4.68 percent in the week ended July 8 from a year ago, compared with 4.96 percent a week earlier.

"The global outlook for growth is positive but downside risks in regard to inflation ... need to be recognized," the review said, urging policy makers in the government to remain "on guard."