India Bumps Up Interest Rates to Cool Inflation

MUMBAI — The central bank of India raised its benchmark interest rates more than expected on Tuesday, saying that it was far more concerned about inflation than it was about slowing growth.

The Reserve Bank of India raised its repo rate by 0.5 percentage points, to 8 percent, its 11th increase since October 2009. Most analysts were expecting an increase of 0.25 points.

“Policy needs to persist with a firm anti-inflationary stance” to counter inflation of nearly 9 percent, the central bank said, noting that while economic growth had moderated, “there is no evidence of a sharp or broad-based slowdown as yet.”

The benchmark Nifty stock index was down 1.6 percent in the early afternoon, after the central bank’s announcement. The Indian rupee climbed modestly against the dollar.

The Reserve Bank of India’s move is likely to slow one of the world’s fastest- growing major emerging economies at a time when growth also appears to be easing in developed economies like the United States, Japan and Europe. Policy makers in China, another major fast- growing emerging market, are also trying to cool the economy amid inflation concerns.

“We certainly have a far more hawkish central bank than we had six or seven months back, when there was a conscious effort to balance growth and inflation,” said Abheek Barua, chief economist at HDFC Bank, a large Indian lender.

The Indian economy expanded at 8.5 percent in its last fiscal year, which ended in March. Some analysts say growth could slow to 7.5 percent in the current business year. The central bank held to its own forecast of 8 percent growth on Tuesday.

In its statement, the central bank was clear that its main focus remains on bringing down India’s inflation rate, one of the highest in the world. In May, India’s consumer price index climbed 8.7 percent from the same period a year earlier, down from 9.4 percent in April.

The central bank said it would like to limit inflation to between 4 percent and 5 percent.

“Several indicators such as exports and imports, indirect tax collections, corporate sales and earnings and demand for bank credit suggest that demand is moderating, but only gradually,” the central bank said. “As such, demand side inflationary pressures continue to prevail.”

The Reserve Bank of India’s policy statement appears to put it at odds with Indian fiscal policy makers, who have been emphasizing the need for faster growth and have suggested that inflation would soon subside.

Last week, the country’s finance minister, Pranab Mukherjee, invited Indian reporters and editors to his office to offer assurances that the government’s reform agenda was not paralyzed by a series of corruption scandals and that the economy would indeed grow 8.5 percent, down from a previous government forecast of 9 percent.

In its statement on Tuesday, the central bank subtly sought to put the onus for the persistently high inflation on the government, saying that the country needed to remove bottlenecks in the food supply, improve its infrastructure and lower its fiscal deficit — areas in which the government has struggled to make progress.

“It is important to recognize that in the absence of appropriate actions for addressing supply bottlenecks, especially in food and infrastructure, questions about the ability of the economy to sustain the current growth rate without significant inflationary pressures come to the fore,” the Reserve Bank of India said.

Mr. Barua of HDFC Bank said the central bank appears to believe that it has no choice but to act more forcefully, but he warned that the high interest rates could significantly slow the Indian economy.

“It’s the monetary policy’s job to pick up the slack, which worked to a point,” he said. “But there is every possibility of monetary policy overdoing things.”

Article source: http://www.nytimes.com/2011/07/27/business/global/india-bumps-up-interest-rates-to-cool-inflation.html?partner=rss&emc=rss