India's central bank raised interest rates on Tuesday by a quarter of a percentage point to clamp down on resurgent inflation and warned of persistently higher food prices unless steps are taken to boost supplies. Although the Reserve Bank of India (RBI) has raised policy rates seven times since March as the economy revived from the global financial crisis, it said the balance of risks had tilted towards stronger inflation and it was ready to respond if price pressures increased.
That backed expectations it will raise rates again in coming months as home-grown price pressures are compounded by a surge in global commodity prices now fanning inflation across emerging markets. Indian bond yields and swap rates eased after the decision as investors were relieved the central bank matched expectations with a 25 basis-point rise in rates, rather than the 50 basis-point increase some investors had expected.
"India has a serious inflation problem, something officials have been highlighting recently. I suspect the market would have been looking for a bolder move in terms of a 50 basis points move," said Jonathan Cavenagh, senior FX strategist at Westpac Institutional Bank in Singapore. The RBI raised its repo rate, at which it lends to banks, to 6.5 percent from 6.25 percent and it lifted its reverse repo rate, at which it borrows from banks, to 5.5 percent from 5.25 percent.
Underlining its inflation concerns, the RBI's governor said the central bank had considered a 50 basis point rise. Economists in a Reuters poll before the policy decision had forecast the central bank would raise rates by 75 basis points in 2011. India's food prices have been rising at double digit pace for much of the past year and its headline inflation in December rose to 8.43 percent from 7.48 percent in November. Mounting raw material costs squeezed quarterly earnings at top Indian household and consumer goods maker Hindustan Unilever, sending its shares down more than 5 percent on Tuesday.