Reserve Bank of India Tightens Further

April 20, 2010

India, Asia’s third largest economy, has an intensifying inflation problem.  In response, the Reserve Bank of India (RBI) lifted its key lending and borrowing rates on March 19 by 25 basis points each to 5.0% and 3.5% and followed those moves with a second 25-bp increase today to 5.25% and 3.75%.  The reserve requirement was also lifted to 6.0% from 5.75%, effective April 24.  The interest rate increase was only half as much as many analysts had predicted, but a statement from the RBI promises further action to counter inflation, absorb excess liquidity, and normalize rate levels as needed.

During the world recession, the RBI implemented six rate cuts totaling 425 basis points between October 2008 and April 2009.  Economic recovery is now firmly in place, with real GDP in 4Q09 some 6.0% greater than a year earlier and industrial output 15.1% higher in February than a year before.  Inflation initially sprouted from the supply side last autumn but has spread to the demand side as well.  WPI inflation, which was 1.5% last October, has accelerated to 9.9%, and consumer prices rose 14.8% in the year to February.  RBI officials warn of a risk of rising expected inflation, and noted that their key interest rates still remain below the actual level of inflation.  It’s surprising they did not hike their rates by 50 basis points, a move the robust economy could have tolerated.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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