India's central bank looks set to tighten monetary policy further after raising interest rates for the first time in nearly two years as it bids to check spiralling inflation, economists say. In a move that surprised experts, the Reserve Bank of India (RBI) hiked short-term rates from record lows late Friday to battle near double-digit annual inflation amid fast-strengthening industrial output.
Expectations had been for a rate hike at the bank's scheduled policy review on April 20 but the RBI said in a statement that inflation had "been a source of growing concern."
The wholesale price index (WPI) in Asia's third-largest economy was 9.89 percent in February, well above the central bank's own estimate of 8.5 percent by the end of the current financial year this month.
On Friday, the RBI raised the repo, the rate at which it lends to commercial banks, by 25 basis points to 5.0 percent. It also raised the reverse repo, the rate it pays to banks for deposits, by 25 basis points to 3.5 percent, saying "inflationary pressures had accentuated and been spilling over to the wider inflationary process."
"The timing of the hike is surprising," said Siddharth Sanyal, economist with Mumbai-based Edelweiss Securities. "With this sudden move, the stance of the central bank is amply clear."
"We expect the bank to raise rates again in April by 25 basis points," Rupa Rege Nitsure, chief economist with the state-run Bank of Baroda, told AFP. Edelweiss Securities also forecasts a similar rate hike in April as India bids to perform the delicate balancing act of tackling high annual inflation while keeping growth on track.
Inflation is a politically sensitive issue in India and the left-leaning Congress-led government has been under attack from opposition parties for its inability to control food prices.
The cost of food has rocketed following the country's worst monsoon in nearly four decades last year, putting pressure on the government to deal with the rising cost of living. Prices of fuel, rubber, plastic and cement all jumped last month, as the economy accelerated out of the global economic downturn, led by a strong recovery in the industrial sector.
The RBI said food prices remain "elevated," adding that increasing consumer demand could potentially add to inflationary pressures in key sectors such as the auto, cement and steel industries.
India's move comes after Australia and Malaysia increased rates this month. In January, RBI governor Duvvuri Subbarao started to tighten monetary policy by siphoning off excess liquidity from the financial system by raising the cash reserve ratio - the amount commercial banks must keep on deposit - by 75 basis points to 5.75 percent.
The Indian economy is expected to expand 7.2 percent in 2009-2010 as Asia makes a rapid economic recovery after the slowdown. "The rate hike has been early by a month, but is unlikely to affect growth," said Rajeev Malik, economist with Macquarie Securities, based in Singapore.
Experts say inflation could jump further next month, which would warrant further action from the central bank. Home, retail and auto loan rates could rise further following Friday's action, media reports said. Analysts expect a cumulative increase of 100 to 125 basis points in policy rates over the next year.
Comments
Comments are closed.