India Faces Continuing Inflation, Raises Interest Rates

Top Quote The Reserve Bank of India has raised the policy lending rate by 25 basis points to 8.25% in a struggle to curb inflation which is at a 13-month high of 9.78%. End Quote
  • (1888PressRelease) September 20, 2011 - India's central bank has raised interest rates for the 12th time in 18 months to try to contain inflation. The Reserve Bank of India raised the policy lending rate, called the repo rate, by 25 basis points to 8.25%. India has been struggling to contain inflation which is at a 13-month high of 9.78%. The move was widely expected by a majority of economists, though some predicted a pause after weak industrial production figures earlier this week. Over the past two years, India, which has the highest inflation rate of any major emerging market, has struggled to rein in prices with tighter monetary policy.

    Fears are growing about the lack of a fiscal response as inflation - triggered by high food prices - has spread across India over the past year. India's inflation rate accelerated to a 13-month high of 9.78% in August, highlighting the dilemma facing policymakers as they wrestle with the challenges of rising prices and a slowing economy. The central bank's latest tightening comes as concerns mount about the health of the global economy and the possibility of debt defaults in some eurozone countries. The Reserve Bank of India's critics say it has been too slow to act against rising prices. Some leading industrialists have complained bitterly about the rising cost of capital and warn that India now competes with global rivals on the cost of labour but little else. There are fears that the Reserve Bank of India will continue to raise rates as inflation has remained high.

    The government is projecting growth of 8.5% for the fiscal year that ends next March - this is threatened by the rising prices, which limit domestic consumers' spending power. Analysts at Corolla Financial say the latest hike in petrol prices will add to the "inflationary pressure". Nearly a dozen hikes in petrol prices over the past two years have raised the price of the fuel by more than 50%. In May, oil firms raised petrol prices by 5 rupees ($0.10; 0.06) a litre - the steepest ever single increase. Last year, the government allowed state-run firms to fix petrol prices but it continues to control the prices of diesel, kerosene and cooking gas to protect the poor and try to keep a check on inflation. India's domestic demand driven economy grew 7.7 per cent in the April-June period, its weakest pace in six quarters, but outperformed even gloomier predictions. Many private economists have cut India's growth outlook citing policy paralysis, high inflation and rising interest rates.

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