India keeps anti-inflationary stance with fresh rate hike

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India keeps anti-inflationary stance with fresh rate hike

MUMBAI — India’s central bank raised interest rates for the 12th time in 18 months on Friday to combat near double-digit inflation, despite signs of slowing economic growth.

By (AFP)

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Published: Fri 16 Sep 2011, 6:46 PM

Last updated: Tue 7 Apr 2015, 5:50 AM

The Reserve Bank of India (RBI) raised its repo rate, at which it lends to commercial banks, by a quarter percentage point to 8.25 percent and increased the reverse repo — the rate it pays to banks for deposits — to 7.25 percent.

RBI governor Duvvuri Subbarao said the move was necessary because inflation remained high and well above the bank’s “comfort zone” of around five percent.

India’s benchmark wholesale price index — the closest watched cost-of-living monitor — hit a 13-month-peak of 9.78 percent in August.

Overall, India’s inflation is the highest of any large global economy.

The monetary tightening lifted the repo rate to a near three-year peak and the reverse repo to its highest in over a decade.

Subbarao said it was “imperative to persist with the current anti-inflationary stance”, adding that future rate decisions will be based on “signs of downward movement in the inflation trajectory”.

The RBI is on its longest run of monetary tightening in a decade and has vowed to fight inflation even at the cost of economic growth.

The hike comes as central banks in countries such as China and South Korea have held rates as they wait to see whether decelerating growth will curb inflation, while Russia and Brazil have cut rates due to concerns over their economies.

India’s Finance Minister Pranab Mukherjee said the rate rise was in line with expectations, as inflation was “very high”.

“Hopefully, the measures taken will bring us to a more comfortable inflationary situation, earlier than later,” he said.

Analysts also expected the move but were divided on whether India’s rate hiking cycle had peaked.

Deepali Bhargava, chief India economist at Espirito Santo Securities, told AFP: “The RBI has left doors open for more rate hikes but the probability is now low.”

But Ritika Mankar, economist at Mumbai’s Ambit Capital, expected further tightening, with another 25 basis points hike in coming months, as high inflationary pressures persist.

The benchmark 30-share Sensex index erased most of its 1.5 percent intraday gain when rates were hiked but recovered marginally to close at 16,933.83, up 0.34 percent.

Industry leaders slammed the hike and called for a boost to reforms.

“Urgent action is required to step up growth momentum in the manufacturing sector,” said Chandrajit Banerjee, director-general, Confederation of Indian Industry.

“Without this, we are concerned about a serious deceleration in the industrial growth rate.”

Latest data show that the blistering pace of growth in Asia’s third largest economy is already slackening. Industrial output grew just 3.3 percent year-on-year in July — its slowest in nearly two years.

And last month, India posted its slowest gross domestic product growth in six quarters, rising 7.7 percent year-on-year.

A rash of interest rate rises has dampened consumer demand in a range of sectors from cars to property, and could hit spending as India’s festive season reaches its peak with the Hindu festival of lights, Diwali, in October.

Loans for cars and homes — often bought at this time of year, which is considered auspicious — will get costlier.

Reducing prices has become a political priority for India’s government, as it banks on higher growth to lift millions out of poverty.

The surge in inflation was initially triggered by spiralling food prices and then exacerbated by rising global commodity prices and higher fuel costs.

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