India’s inflation-fighting central bank yesterday raised interest rates by a quarter-point, the 13th hike since March last year, while warning of a further economic slowdown this year.
The rise in borrowing costs is likely to infuriate business leaders who are already worried about growing signs of slackening domestic demand in Asia’s third-largest economy.
However, the Reserve Bank of India (RBI) said it might be the last rate hike this year.
“The likelihood of a rate action in the December mid-quarter review is relatively low,” Reserve Bank of India Governor Duvvuri Subbarao said in a statement on the bank’s Web site.
“If the inflation trajectory conforms to our projections, further rate hikes may not be warranted,” he said.
The latest rise of 25 basis points takes the RBI’s repo rate at which it lends to commercial banks to 8.50 percent and increases the reverse repo — the rate it pays banks for deposits — by the same level to 7.50 percent.
Indian Finance Minister Pranab Mukherjee said last week that “dark clouds” were casting a shadow on India’s economy, with the central bank cutting its growth forecast for the current financial year to March next year.
Expansion in GDP is now seen at 7.6 percent rather than an earlier forecast of 8 percent, the bank said.
The benchmark wholesale price index — the government’s most watched cost-of-living monitor — has been stubbornly high at 9.72 percent last month, marginally down from 9.78 percent the previous month.
That is well above the central bank’s comfort zone of 6 percent and marks the highest inflation rate among the world’s major economies.
The bank said yesterday that it saw inflation slowing to 7 percent by March next year.
India’s repo rate is at a near three-year high and the reverse repo is at its highest level in more than a decade.
Analysts, who widely expected yesterday’s hike, said the latest increase could mark the peaking of India’s rate cycle and predicted that it could be the last one until at least the end of this year.
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