MUMBAI: India’s central bank on Tuesday hiked interest rates by 25 basis points, its seventh increase in less than 12 months in a bid to tame rising inflation as the country’s economy booms.
The Reserve Bank of India has been one of the most aggressive central banks in raising the cost of borrowing as the nation has powered out of the global downturn with economic growth of nearly nine per cent.
The expected rise pushed the repo — the rate on loans the central bank makes to commercial banks — to 6.5 per cent, and the reverse repo — the rate it pays to banks for deposits — to 5.5 per cent.
RBI governor Duvvuri Subbarao said inflation remained at “elevated levels” in Asia’s third-largest economy, prompting a need to continue with steps to curb prices and lower “inflationary expectations.”
“The prospects of food and fuel price rises spilling over to the general inflation process is rapidly becoming a reality,” Subbarao said, with wages already on the rise to offset inflation.
Annual inflation surged in December to 8.43 per cent, up nearly a percentage point from the previous month.
The bank maintained its growth forecast for the current financial year to March at 8.5 per cent. But it raised its year-end inflation projection to 7.0 per cent from 5.5 per cent — reflecting rises in food, petrol and metal prices.
In India, pressure has been mounting on the central bank and the government to curb inflation as Premier Manmohan Singh and his Congress party gear up for nine state elections over the next year-and-a-half.
Rising food prices have added to public anger over a series of massive corruption scandals, creating a toxic mix for Singh’s administration just 18 months into its second term.
The price of onions, for example — a staple on family shopping lists and known as a politically potent issue — has tripled to 80 rupees ($1.75) a kilogramme in a few months.
Economists are divided on the efficacy of raising rates to tackle inflation driven by food prices, but all agree sustained rising prices can lead to a destabilising wage-price spiral.
Subbarao said inflation could emerge a “global concern” this year as demand strengthens in fast-rising emerging markets and recovery consolidates in developed economies.
Price rises are already surfacing as a major political and economic challenge in emerging markets across Asia, with China also expected to raise interest rates next month to combat inflation and a property bubble.
Food for thought: Will inflation be a rising trend for the countries around Asia or perhaps, around globally? What are you hedging against inflation today when your dollar is “being flushed” away bit by bit? Or are you being educated financially to grow into the path of financial freedom? Awesome!