The Reserve Bank of India announced Thursday a surprise 0.25 points hike in key short-term lending rates to 5.0 percent on concern that high oil prices will stoke inflation in Asia's fourth-largest economy. Analysts had widely expected the central bank to keep interest rates on hold to spur growth but the RBI said that rising "uncertainty on the oil front" and increased domestic demand could lead to higher prices. "Countering inflationary pressure is our highest priority," RBI governor Y.V. Reddy said at a press conference after the rate hike.
It was the second quarter percentage hike in the repurchase rate that commercial banks pay for short-term loans in the past six months. The central bank, releasing its bi-annual policy statement, kept the long-term bank rate, the benchmark for loans by commercial banks, at a three-decade low of 6.0 percent.
The central bank policy statement on interest rates and prospects for the economy released Thursday is published every April and October and closely watched by the markets and borrowers who hope for steady rates to ensure continued strong growth in the country of more than one billion people.
In October, the central bank hiked the short-term rate by a 0.25 points to 4.75 percent after inflation reached an almost three-and-a-half-year high of 8.33 percent in August.
Wholesale price inflation which tracks food, fuel and other commodities weekly, is now running at 5.48 percent.
In a set of forecasts in the policy statement, the central bank said the economy would grow 7.0 percent in the year to March 2006 and inflation would track at 5.0-5.5 percent.
India's economic growth slowed to 6.9 percent in the year to March 2005 from 8.2 percent the previous year after poor summer monsoon rains cut farm output in the still largely rural economy.
The central bank warned that a fresh upturn in crude prices could lead to lower growth.
"The outlook for growth, which should be noticeably better than the previous year, may get moderated slightly by conditions in the oil markets which remain tight," the central bank said.
India imports 70 percent of its gas and oil needs annually with the bill rising on the back of global prices.
The central bank has been trying to moderate the impact of rising oil prices by allowing the rupee to strengthen gradually against the dollar with a five percent gain in the past year.