A Seventh Rate Increase in India

January 25, 2011

The Reserve Bank of India today implemented another round of 25-basis point hikes in its key repo lending rate to 6.5% and its reverse repo borrowing rate to 5.5%.  Officials also retained their 6.0% reserve requirement.  Today’s action was influenced by an acceleration of WPI inflation to 8.43% in December from 7.48% in November, which persuaded officials to revised projected inflation as of March 2011 to 7% from 5.5% assumed previously.  India had six rounds of rate increases last year.  Such were announced March 9, April 20, July 2, July 26, September 16, and November 2.  The July and September reverse repo rate changes were by 50 basis points, and all others amounted to 25 bps apiece.  Prior to March 2010, the repo and reverse repo rates were at 4.75% and 3.25%.

A statement released today said that countering excessive inflation is the main current policy concern.  Specific fears are that elevated food and fuel prices could spill over into general pressures because of structural demand-supply imbalances, thereby cause expected as well as actual inflation to trend higher.  Officials are also being careful to promote output and financial stability to guard against deficient money market liquidity. 

The statement projects real growth of 8.5% in fiscal 2011 with an upside bias and a current account deficit equal to 3.5% of GDP, which is considered unsustainable in the long run.  Non-food credit growth of 24.4% is presently well above its target expansion rate of 20%.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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