India central bank raises key interest rate

AP News
Posted: Jul 26, 2011 7:46 AM
India central bank raises key interest rate

India's central bank raised its key interest rate by half a percentage point Tuesday, the 11th hike in less than a year and a half, as it warned that inflation remains the country's main economic concern.

The bank raised its short-term lending rate _ or repo rate _ from 7.5 percent to 8 percent, a higher increase than expected after inflation rose to 9.4 percent in June from 9.1 percent in May.

"Inflation continues to be the dominant macroeconomic concern," said Reserve Bank of India Governor Duvvuri Subbarao, "Going forward, the monetary policy stance will depend on the evolving inflation trajectory."

Annual inflation could hit 7 percent this year, the bank said, raising its earlier projection of 6 percent. However, it maintained its annual growth projection at 8 percent for the fiscal year through March 2012.

The half-point rake hike was seen as a sign that the Reserve Bank of India is willing to sacrifice short-term growth to control inflation, which despite the bank's actions is still worse in India than in any other major Asian economy.

High oil prices, loose fiscal policy and supply constraints have muted the impact of the RBI's long fight against inflation.

"Another round of tightening may come" during the bank's next review in September, said D.K. Aggarwal, chairman and managing director of Sanlam Investments and Advisors, in a statement. "RBI in a conscious effort is trying to calm down the private consumption."

But business leaders warned of a risk to growth, given a slowdown in industrial output and high world oil prices.

"There could be a tipping point beyond which salvaging a downward spiral of growth could be an arduous task," said Chandrajit Banerjee, the head of the Confederation of Indian Industry.

The central bank on Tuesday appeared to chastise the government for fueling inflation, saying in its quarterly review of monetary policy that "the economy's ability to grow rapidly for any length of time without provoking inflation is dependent on implementing policies, with corresponding resource allocations, which will allow the supply of various products and services to keep pace with demand."

With the short-term borrowing rate fixed at 1 percentage point below the repo rate, it was raised to 7 percent in line with the bank's latest decision.

The benchmark Sensex stock index fell 1.9 percent to close at 18,518.22.