NEW DELHI // India's central bank has raised interest rates for the 12th time since the start of March last year, breaking ranks among the so-called BRIC nations that have either cut or held borrowing costs as the global recovery falters.
The Reserve Bank of India (RBI) increased the repurchase rate to 8.25 per cent from 8 per cent, it said in a statement yesterday. Fourteen of 17 economists in a Bloomberg News survey predicted the decision and three expected no change.
The move by Duvvuri Subbarao, the RBI governor, contrasts with Brazil and Russia, which cut borrowing costs in the past month, while China has paused rate increases since early July. Higher food and fuel prices and weakness in the rupee may keep inflation above 9 per cent, a level exceeded in each of the past nine months.
"The decision clearly points out that the RBI's top priority is curbing inflation despite concerns about global turmoil," said Indranil Sen Gupta, an Asia economist at Bank of America in Mumbai. "There will be pressure on inflation after last evening's petrol-price increases and the rupee's depreciation."
The yield on the 7.8 per cent bond due in April 2021 rose 1 basis point, or 0.01 of a percentage point, to 8.34 per cent in early afternoon in Mumbai. The Bombay Stock Exchange Sensitive Index gained 1 per cent. The rupee advanced 0.1 per cent to 47.50 per dollar.
The rupee has declined 5.9 per cent this quarter, the biggest fall in Asia, as investors shun emerging markets on concern the world economy is weakening. Inflation in India is the highest among the BRICS nations - which also include Brazil, Russia, China and South Africa - quickening to a 13-month high of 9.78 per cent last month.
Consumer prices rose 7.2 per cent in Brazil, 8.2 per cent in Russia and 6.2 per cent in China last month from a year earlier. In South Africa, they climbed 5.3 per cent in July.
"Inflation remains high, generalised and much above the comfort zone of the Reserve Bank," the central bank said. "A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is therefore imperative to persist with the current anti-inflationary stance."
Mr Subbarao has increased borrowing costs by a total of 350 basis points since mid-March last year, the fastest round of increases since the RBI was established in 1935, Bloomberg data show.
India needs to control inflation to protect purchasing power and sustain growth, the RBI has said. The US$1.7 trillion (Dh6.24tn) economy expanded 7.7 per cent in the three months ending on June 30 compared with a year earlier, the slowest pace since the last quarter of 2009. GDP rose 7.8 per cent in the previous three months.
"Growth in India is moderating and not collapsing," Leif Eskesen, an economist at HSBC Holdings in Singapore, said before the report. "The global softness is clearly a concern, but India's more domestically orientated economy is less vulnerable than other Asian economies."
The RBI said that even as many indicators pointed to moderating growth, "in the current scenario, with the likelihood of inflation remaining high for the next few months, rising inflationary expectations remain a key risk".