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India hikes rates to fight inflation Add to ...

India’s central bank raised interest rates on Thursday for the 10th time since March, 2010, and said it will persist in its battle against stubbornly high inflation, playing down worries about slowing growth in Asia’s third-largest economy.

The rate increase follows moves by China and Brazil to tighten monetary policy as the major emerging economies face a common battle of high inflation and economic growth that is easing from last year’s heady pace.

The Reserve Bank of India 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 9 per cent.

“Notwithstanding both signs of moderation in commodity prices and some deceleration in growth, domestic inflation risks remain high,” the central bank wrote in its mid-quarter policy review.

“Against this backdrop, the monetary policy stance remains firmly anti-inflationary, recognizing that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control,” it said.

Stocks briefly swung into positive territory before dropping again, and were down about 0.5 per cent in early afternoon trade. The yield on the benchmark 10-year government bond rose 4 basis points after the policy release to 8.37 per cent.

Economists expect a further 50 basis points of rate increases in India in 2011, a Reuters poll showed earlier this week.

“While the central bank recognized 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.

Central bankers in the world’s big emerging economies that have led recovery from the global financial crisis face a balancing act as growth slows but inflation stays high. A stalling U.S. recovery and weakness in Europe and Japan add to the challenge of managing inflation without choking growth.

The central bank also raised the reverse repo rate , at which it absorbs excess liquidity, by 25 basis points to 6.5 per cent. Last month, it pegged the rate at 1 percentage point below the repo rate.

Thursday’s rate increase followed a sharper-than-expected 50 basis point rate rise in early May, although data since then has pointed to slowing momentum in India and globally.

Annual economic growth in January-March slipped to a lower-than-expected 7.8 per cent, the slowest pace in five quarters, as the rise in credit costs and inflation weighed on consumption and investment.

However, the central bank did not sound worried on Thursday about the growth outlook.

“Even as there is deceleration in some important sectors, notably interest-sensitive ones such as automobiles, there is no evidence of any sharp or broad-based slowdown,” the central bank said in its release.

Car sales in May rose 7 per cent, their weakest rise in two years.

“The paints industry is already seeing moderation in demand and the continuous increase in rates will hurt us further,” said H. M. Bharuka, managing director at Kansai Nerolac Paints . “We are expecting tightening of interest rates to dampen demand from auto and housing sectors.”

Evan after 10 rate rises, inflation is stubbornly high. Wholesale prices, India’s main measure of inflation, rose more than 9 per cent in the year through May, much more than expected. Worryingly, the figures showed price pressures had spread from food and fuel to manufacturing.

Data on Thursday showed food and fuel inflation at around 9 per cent and 12.8 per cent, respectively, in the year to June 4.

Inflation could be exacerbated in coming months, if as expected, New Delhi takes the politically unpopular decision to raise the price of diesel and cooking fuel to ease the cost of subsidies in the face of high world oil prices.

“In a scenario where the RBI will continue to persist with the anti-inflationary stance and inflation is only going to get uglier, it’s unlikely that the RBI will press the pause button soon,” said Deepali Bhargava, economist at ING Vysya Bank in Mumbai.

 

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