MUMBAI: India on Tuesday hiked interest rates to their highest level since early 2008, joining South Korea and Thailand in increasing borrowing costs this month, amid mounting concern about inflation across Asia.
India's central bank has been the most aggressive in the region in raising rates as the nation powers out of the financial downturn with economic growth of nearly nine percent.
The seventh rate hike in less than 12 months pushed the repo to 6.5 percent, and the reverse repo to 5.5 percent.
Reserve Bank of India governor Duvvuri Subbarao said inflation remained at "elevated levels" in Asia's third-largest economy, requiring 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 warned.
The move followed advice from the International Monetary Fund (IMF) in its world economic report that policymakers in emerging economies should take steps to keep overheating pressures in check.
Subbarao said that inflation could emerge as a "global concern" this year.
Wages in India are already on the rise to offset annual inflation which surged in December to 8.43 percent, up nearly a percentage point from the previous month, stoked by a surge in food prices.
Pressure has been mounting on the central bank and the government to contain inflation as Premier Manmohan Singh and his Congress party gear up for nine state elections over the next year-and-a-half.
High 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 governor of the Reserve Bank has taken appropriate steps to control inflation," said Finance Minister Pranab Mukherjee.
Economists said more rate hikes were in the offing.
"The Reserve Bank has launched its attack on inflation. We expect the bank to raise rates again" in February," said Rupa Rege Nitsure, chief economist at state-run Bank of Baroda.
Jigar Shah, head of research at Kim Eng Securities, forecast the bank would raise rates by another 75 to 100 basis points over the next 15 months.
Price rises are surfacing as a major political and economic challenge in emerging markets across Asia.
South Korea and Thailand raised rates earlier this month while China is expected to increase its rates next month to combat inflation and a property bubble.
Economists are divided on the efficacy of raising interest rates to tackle inflation driven by food prices, but all agree sustained rising prices can lead to a destabilising wage-price spiral.
Shares in India, which have fallen to three-month lows on fears of sustained interest rate rises, extended gains to nearly one percent after the central bank decision was announced.
"The bank is trying to do a balancing act, to maintain growth while controlling inflation," said Shah of Kim Eng Securities.
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