India’s Thirteenth Interest Rate Hike of this Tightening Cycle

October 25, 2011

Seven interest rate hikes so far in 2011 total 225 basis points and bring the levels of the repo (central bank lending) rate to 8.5% and of the reverse repo to 7.5%.  The reserve requirement ratio was held steady at 6%, as it had at the previous policy meeting on September 16th.  In 2010, there had been six interest rate increases beginning with a 25-basis point move in March and totaling 200 basis points.  Today’s adjustments were also 25 basis points in size.

A new statement on the Reserve Bank of India web site again asserts that inflation, which continues to exceed 9.0%, remains above the central bank’s “comfort level” and flags the risk of an advance in expected inflation if policy tightening ends prematurely.  Money and credit growth has meanwhile exceeded what officials were anticipating.

However, the central bank’s statement drops some clues that end or pause in tightening could be nearing.  “Momentum indicators, particularly the de-seasonalised quarter-on-quarter headline and core inflation measures, indicate moderation. This is consistent with the projection that inflation will decline beginning December 2011. …Growth is clearly moderating on account of the cumulative impact of past monetary policy actions as well as some other factors.  As inflation begins to decline, there will be growing room for the policy stance to give due consideration to growth risks, within the overall objective of maintaining a low and stable inflation environment.”

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



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