India raises rates to rein in inflation

(News Today) - India has raised interest rates for the fifth time this year, in a bid to contain fast-rising consumer prices, and signaled that its accommodative monetary policy adopted during the global financial crisis had come to an end.

India is the largest economy to tighten monetary policy with successive rate rises, as its recovery from the global economic downturn gathers pace.

The Reserve Bank of India said on Thursday that it was moving closer to a neutral monetary policy by raising its repo rate -- at which the central bank lends to commercial banks -- by 25 basis points to 6 per cent. It increased the reverse repo rate 50 bps to 5 per cent.

The central bank said it was tightening monetary policy in light of a robust international outlook and a consolidated recovery in the domestic economy.

Industrial production exceeded most expectations by bouncing back strongly in July, while the agricultural sector is forecast to regain its strength this year after much better seasonal rains.

In a statement, Duvvuri Subbarao, the central bank governor, said that the RBI's global outlook had been influenced by the "remarkable resilience" that Europe had shown in emerging from the sovereign debt crisis this year.

But the RBI cautioned that its "dominant concern" was inflation. The wholesale price index, India's most closely watched inflation measure, has stubbornly remained in double digits, in spite of promises by political leaders that it would fall to 6 per cent by the end of the year.

Analysts warned that food price inflation had spread to other sectors of the economy as a result of supply constraints and rising domestic demand. Economists said the RBI's action meant that the need for additional measures in the months ahead had lessened.

"It's going to be more data-driven policy action from now on," said Samiran Chakraborty, economist at Standard Chartered Bank in Mumbai. "Another 25 bps hike can easily come in December. But what [the RBI] is telling us is that aggressive policy action is over, as the system doesn't need it any more."

Mr Chakraborty warned that the RBI might have to turn its attention to asset price inflation in the months ahead as capital flows were attracted to certain sectors of the Indian economy.

"The reason for rate hikes may become asset price inflation rather than goods price inflation," he said.

Economists have predicted steady tightening throughout the year to balance serious capacity constraints where supply is not keeping pace with demand. They see scope for much higher interest rates and have recommended that the central bank aggressively tackle domestically generated price pressures.

The rate rise checked India's financial markets. Sensex, the benchmark index on the Bombay Stock Exchange, dipped on the announcement of the monetary policy change, but recovered slightly to trade 77 points down at 19,425.

Source : CNN

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