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India cbank raises rates, signals tightening pause

Mumbai, November 2, 2010

India's central bank raised interest rates for the sixth time this year on Tuesday to tame stubbornly high inflation but said there was little chance of another increase near term.  

The Reserve Bank of India (RBI) raised its lending and borrowing rates by 25 basis points each, as expected by most analysts, and pledged to remain vigilant about inflation, which at 8.6 percent is well above policymakers' comfort level.   

"Clearly, the RBI plans to pause in its tightening cycle at least until H1 2011 but they can't be complacent given an economy on a strong footing and both actual inflation and expectations are high," said Sean Callow, senior currency strategist at the Westpac Institutional Bank in Sydney. 

The RBI lifted the repo rate, at which it lends to banks, to 6.25 percent and raised the reverse repo rate, at which it absorbs excess cash, to 5.25 percent.   

Both India and Australia announced rate rises on Tuesday to temper their strong rebounds from the global financial crisis, in contrast to faltering recoveries in much of the developed world that are forcing the US and Japanese central banks to relax further their already super-loose monetary policy.  

Indeed, the US Federal Reserve is widely expected to announce on Wednesday that it will inject about $500 billion into its financial system, a measure that could ultimately prove inflationary for emerging economies such as India.

Several Asian central banks are tightening policy -- most lately China and Singapore -- but a flood of investment money hitting emerging markets has prompted some countries, such as Thailand, to be cautious and so put rate increases on hold.

"Based purely on current growth and inflation trends, the Reserve Bank believes that the likelihood of further rate actions in the immediate future is relatively low," Reserve Bank of India Governor Duvvuri Subbarao said in his monetary policy review. 

"However, in an uncertain world we need to be prepared to respond appropriately to shocks that may emanate from either the global or the domestic environment," he said.

The 4-month overnight indexed swap rate fell by 10 basis points to 6.45 percent after the RBI news to price in lower expectations for another rate rise before the March 31 end of the fiscal year.

Still, the RBI and other policymakers expressed concern about inflation, particularly since food price pressures have failed to ease following a successful summer monsoon.   

They worry that food inflation, which was 13.75 percent in mid-October, can feed inflation expectations and so cause wider price pressures to bubble in the economy. "This has emerged as a major concern," said Finance Minister Pranab Mukherjee. "The drivers of inflationary pressures are the enhancement and increase of food prices."    

Deputy head of the Planning Commission, Montek Singh Ahluwalia, said the RBI had provided a "good balance" between the need to control inflation and to maintain growth.
 - Reuters 




Tags: India | RBI | rate rise |

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