India’s Central Bank raises rates to curb inflation

The reserve bank of India tightened its monetary policy once again, the tenth rate hike since March 2010, in an attempt to contain spiralling inflation.

The repo, the rate at which the RBI lends, was raised by a quarter point to 7.5%. The reverse repo, the rate at which the central bank borrows from banks, was adjusted to 6.5% from 6.25%.

The last central bank move was in May, when it lifted rates by 50 basis points. Despite a slowdown in economic growth, the bank led by Governor Duvvuri Subbarao found it appropriate to hike rates once again.

The latest policy action is expected to contain inflation and anchor inflationary expectations. It will also mitigate risks to growth from potentially adverse global developments.

“Based on the current and evolving growth and inflation scenario, the Reserve Bank will need to persist with its anti-inflationary stance of monetary policy,” the bank said in the Mid-Quarter Monetary Policy Review.

Domestic inflation persists at ‘uncomfortable levels’. In the current situation, some short-term easing in growth may be unavoidable to bring inflation down, the RBI said.

“While the Reserve Bank needs to continue with its anti-inflationary stance, the extent of policy action needs to balance the adverse movements in inflation with recent global developments and their likely impact on the domestic growth trajectory,” the bank said.

During the January to March period, India’s GDP growth was at 7.8% year-on-year, down from 8.3% in the prior quarter. Meanwhile, the GDP growth estimate for financial year 2011 was downwardly revised to 8.5% from 8.6%.

Staff

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