India's central bank raised interest rates yesterday for the 10th time in just over a year to combat stubbornly high inflation and signalled more increases to come even as growth in Asia's third-largest economy is slowing down.
The Reserve Bank of India (RBI) raised the repo rate, at which it lends to banks, by 25 basis points to 7.5 per cent, in line with expectations in a Reuters poll. Wholesale inflation stands at nine per cent, roughly double the central bank's comfort level.
Policymakers in the world's big emerging economies that led the world's recovery from the financial crisis face a balancing act as growth slows but inflation stays high. A stalling US recovery and weakness in Europe and Japan add to the challenge of managing inflation without choking growth. Inflation trumps growth concerns for now.
India's rate rise followed moves to tighten policy by China, Brazil and South Korea.
"Domestic inflation risks remain high," the Reserve Bank of India wrote in its mid-quarter review. "Against this backdrop, the monetary policy stance remains firmly anti-inflationary, recognising that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control," it said.
Rising rates and slowing growth add to the headaches for an embattled government buffeted by criticism over persistent inflation as well as its handling of a spate of corruption scandals and its inability to push through reforms.
Some 15 months of rate increases in India are taking a toll on companies and investor sentiment. Car sales growth slowed in May to its weakest pace in two years and investors are afraid, pushing India's main stock index down 12 per cent this year, making it Asia's worst performer.
Economists expect a further 50 basis points of rate rises in India in 2011, a poll showed, with tightening seen to be near its peak.
"While the central bank recognised that the ‘global environment has changed for the worse' most of the comments remained hawkish," said Robert Prior-Wandesforde, economist at Credit Suisse in Singapore.
From / Gulf News