MUMBAI: India’s central bank yesterday announced a surprise quarter-point rise in its key interest rate, signalling that taming inflation is the priority rather than spurring growth months before an election.
After a meeting in the financial hub Mumbai, the Reserve Bank of India (RBI) lifted the benchmark repo rate, at which it lends to commercial banks, to 8.0 percent. The cash reserve ratio, the amount banks must keep in hand to withstand financial shocks, was left unchanged at 4.0 percent.
The currency rose on the news, firming by about half a rupee to Rs62.66 to the dollar from Monday’s more than two-month low.
The unit has come under renewed pressure amid investor fears about the impact of a rollback in the US Federal Reserve’s easy money policy on India and other emerging markets.
“The decision was a close one this time around,” RBI Governor Raghuram Rajan, who has steered a hawkish course since he took over last year, told reporters.
“But we chose to act,” he said, adding, “some aspects of inflation continued to be sticky despite a fall in vegetable prices that suggested to us some more medicine was required.”
The rate hike was unexpected, with most economists forecasting borrowing costs would remain on hold, especially after a fall in the widely watched Wholesale Price Index last month to 6.16 percent year-on-year in December from 7.52 percent in November.
Yesterday’s announcement disappointed business leaders, who have been clamouring for a rate cut to spur an economy which has been growing at a decade low.
Chandrajit Banerjee, director general of the Confederation of Indian Industry, said he was “surprised” by the decision.
“This is an opportune time to accord a precedence to growth over inflation,” he said.
But Rajan said there were still upward pressures on inflation from factors such as rising services prices, which needed addressing “resolutely” even while “recognising the economy is weak and substantial fiscal tightening is likely” in the January-March quarter.
Madan Sabnavis, chief economist, Care Ratings, said: “Usually the RBI talks about growth and inflation. But this time it was just inflation and inflation.
“The signal is, corporates should not expect growth to be driven by interest rate adjustments.”
The RBI raised rates in both September and October to fight inflation, but then surprised markets by holding them steady in December even after inflation accelerated to a 14-month peak.
According to a macroeconomic report on Tuesday the central bank expects headline consumer price index inflation to remain above nine percent for the rest of this financial year to the end of March.
AFP
