Reserve bank lifts rates by 50 bps

RESERVE BANK LIFTS RATES BY 50 BPS, MORE THAN EXPECTED

The Reserve Bank of India (RBI) raised interest rates by a higher-than-expected 50 basis points on July 26,2011 stepping up its fight against persistently high inflation despite slowing growth in Asia's third-largest economy. The RBI increased the repo rate, at which it lends to banks, to 8%, exceeding market expectations that it would raise rates by 25 basis points. The rate increase is its 11th since March 2010, making the RBI one of the most aggressive inflation fighters among central banks. Still, wholesale price index inflation was 9.44% in June, more than double the central bank's comfort level, and high prices are expected to persist in coming months. The central bank, whose forecasts for inflation have proven optimistic in recent quarters, increased its outlook for wholesale inflation at the end of the fiscal year in March to 7%, from 6% earlier. "Considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance," RBI governor Duvvuri Subbarao wrote in his quarterly policy review. The RBI stuck with its forecast for economic growth in the current fiscal year of around 8%. While some interest-rate sensitive sectors are showing signs of moderating growth, it said, "there is no evidence of a sharp or broad-based slowdown as yet." All 23 analysts in a Reuters poll last week had expected the RBI to raise rates by 25 basis points on Tuesday, although 9 of them expected a pause in the tightening cycle after July amid signs of slowing domestic growth and global uncertainty. Recent industrial output and manufacturing data was the worst in nine months, while sales of cars have slowed sharply and loan demand is easing, complicating the central bank's inflation-fighting task. Subbarao said Tuesday's policy actions are expected to "maintain the credibility of the commitment of monetary policy to controlling inflation." The measures are also expected to "reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required," Subbarao said in his report. January-March quarter growth was a worse-than-expected 7.8%, with economists expecting India to grow at 7.9% in the fiscal year that began in April, according to a Reuters poll, less than the 8.5% growth in the fiscal year that ended in March

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