March 4, 2021

India, Citing Inflation Fears, Raises Interest Rates

The Reserve Bank of India raised its repo rate, the rate at which it lends money to commercial banks, by 0.5 percentage point, to 8 percent, its 11th increase since October 2009. Most analysts were expecting an increase of 0.25 point.

“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 50-stock index fell 1.9 percent Tuesday. The Indian rupee climbed modestly against the dollar.

The Reserve Bank of India’s move is likely to slow one of the fastest-growing major emerging economies at a time when growth also appears to be easing in developed economies like Europe, Japan and the United States. 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 a rate of 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 it remained focused 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 4 to 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 policy statement appears to put the central bank at odds with Indian fiscal policy makers, who have been emphasizing the need for faster growth and have suggested that inflation will soon subside.

Last week, the finance minister, Pranab Mukherjee, invited Indian reporters and editors to his office to offer assurances that the government’s reform agenda had not been 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 Tuesday, the central bank subtly sought to put the onus for the persistently high inflation on the government, saying it needed to do better in areas in which it 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 appeared to believe that it had no choice but to act more forcefully, but he warned that the high interest rates could significantly slow the 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.”

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