India hikes key interest rate by quarter point

AP News
Posted: Jun 16, 2011 4:26 AM
India hikes key interest rate by quarter point

India's central bank on Thursday raised its key interest rate to 7.50 percent from 7.25 percent, its 10th hike in just over a year, saying inflation persists at uncomfortable levels and the global environment has changed for the worse.

Consequent to the increase in the short-term lending rate _ or repo rate_ the reverse repo rate will stand automatically adjusted to 6.5 percent, the Reserve Bank of India said in a statement.

It said that domestic conditions were broadly consistent with its projections, with the inflation rate rising to 9.1 percent in May from 8.7 percent in April.

The main drivers of inflation in April-May were minerals, textiles, fuel and nonfood manufactured products.

In the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control, it said.

India suffers from the worst inflation of any major Asian economy despite the Reserve Bank's aggressive rate hikes, suggesting that curing the problem will require structural reform, rather than monetary policy alone.

The bank said the gross domestic product growth slowed to 7.8 percent in the fourth quarter of 2010-11 from 8.3 percent in the previous quarter and 9.4 percent in the corresponding quarter a year ago. GDP growth for fiscal year ending March 2011 was 8.5 percent.

The bank said the global environment has changed for the worse since its annual policy statement in May.

Lead indicators suggest that growth moderated in both advanced economies and emerging market economies under the impact of high oil and other commodity prices, the spillover from the Japanese natural disasters and monetary tightening to contain inflationary pressures, it said.

"From our monetary policy perspective, global commodity prices still remain the key external risk though some signs of moderation are becoming visible," it said.