India makes surprise rise in rates
By Erika Kinetz |
March 22, 2010, Monday
|
Print Edition
Print Edition
INDIA'S central bank has unexpectedly hiked key interest rates a quarter of a percentage point, as the bank tries to cool high inflation amid a faster-than-expected economic rebound.
The bank raised the benchmark repo rate - at which the central bank makes short-term loans to commercial banks - to 5 percent and raised the reverse repurchase rate - the rate at which it borrows from commercial banks - to 3.5 percent, with immediate effect.
"These measures should anchor inflationary expectations and contain inflation going forward," the Reserve Bank of India said in a statement after trading hours last Friday. "As liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected."
Most economists had expected a rate hike, but not until the bank's scheduled policy meeting on April 20.
The RBI said robust growth in manufacturing, a revival of investment, expanding exports and increasing bank credit gave it confidence that economic growth is consolidating.
Inflation, however, has become a growing concern. The headline Wholesale Price Index inflation for February was 9.9 percent, higher than the bank expected, and inflation is spreading from drought-induced high food prices into other sectors of the economy, like manufactured goods.
"With rising demand side pressures, there is risk that WPI inflation may cross double digits in March," the RBI said.
This is India's first rate increase since it began implementing aggressive monetary stimulus measures amid the global financial downturn.
The bank raised the benchmark repo rate - at which the central bank makes short-term loans to commercial banks - to 5 percent and raised the reverse repurchase rate - the rate at which it borrows from commercial banks - to 3.5 percent, with immediate effect.
"These measures should anchor inflationary expectations and contain inflation going forward," the Reserve Bank of India said in a statement after trading hours last Friday. "As liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected."
Most economists had expected a rate hike, but not until the bank's scheduled policy meeting on April 20.
The RBI said robust growth in manufacturing, a revival of investment, expanding exports and increasing bank credit gave it confidence that economic growth is consolidating.
Inflation, however, has become a growing concern. The headline Wholesale Price Index inflation for February was 9.9 percent, higher than the bank expected, and inflation is spreading from drought-induced high food prices into other sectors of the economy, like manufactured goods.
"With rising demand side pressures, there is risk that WPI inflation may cross double digits in March," the RBI said.
This is India's first rate increase since it began implementing aggressive monetary stimulus measures amid the global financial downturn.
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