Reserve Bank of India Implements Fifth Rate Hike Since March

September 16, 2010

As on July 27, India’s repo rate was raised 25 basis points, but the reverse repo rate was increased by 50 basis points.  Analysts had only predicted a 25-bp advance in each rate.  The new levels are 6.0% and 5.0%, respectively.  Reserve ratios were not changed.  Rates were also raised by 25 bps each on March 19, April 20, and July 2nd.  The rate levels prior to the first tightening in March were 4.75% on the repo and 3.25% on the reverse repo.

India has Asia’s third largest economy after China and Japan.  During the world recession, the repo rate was slashed six times, first by 100 bps in October 2008 and followed by cuts of 50 bps in November, 100 bps in December, 100 bps again in January 2009, 50 bps in March and 25 bps in April 2009.  The new 6.0% repo rate remains 300 basis points below its prior peak of 9.0%.  A toughly-worded statement of explanation after today’s action expresses concern about interest rates that lie below inflation.  WPI inflation, which is India’s preferred gauge of price pressure, averaged 10.6% in the second quarter of this calendar year but edged lower to 9.8% in July and 8.5% last month. The statement expresses some hope that inflation is responding to monetary restraint, calls inflation “the dominant concern” of policy, and asserts that “inflation rates have reached a plateau but are likely to remain at unacceptably high levels for some months.”

Like their counterparts at several other central banks, officials at the Reserve Bank of India began raising interest rates earlier this year as part of a “normalization” process.  In India’s case, another reason to tighten has been to counter the high inflation rate and keep price expectations from moving upward.  Today’s statement indicates that the monetary situation appears now “close to normal.”  However, the second reason for potential further interest rate hikes continues.  Officials promise to monitor current and expected macroeconomic conditions, “particularly the price situation, and to take further action as warranted.”

One final observation concerns what officials had to say about the global economy.  In contrast to the warnings about slower growth amid unusually high uncertainty, RBI authorities concluded that “the big picture has not worsened significantly since July.”  No mention is made of the rupee, which is trading about 4% higher than year-ago levels against the dollar.

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



Comments are closed.