India Raises Interest Rates for First Time Since 2008 (Update1)
March 19 (Bloomberg) — India’s central bank unexpectedly raised interest rates for the first time since July 2008 after inflation accelerated to a 16-month high.
The Reserve Bank of India increased the benchmark reverse repurchase rate to 3.5 percent from a record-low 3.25 percent and the repurchase rate to 5 percent from 4.75 percent, according to a statement in Mumbai. The surprise decision comes a month before the bank’s scheduled monetary policy meeting.
India and China, the world’s fastest-growing major economies, are withdrawing stimulus steps as stronger consumer demand stokes inflation and asset bubbles. Governor Duvvuri Subbarao’s move came after Prime Minister Manmohan Singh’s top economic advisers this week described the current inflation rate as “worrying” and “unacceptable.”
“The growth trend has been persistently surprising on the upside,” Chetan Ahya, the Singapore-based regional economist at Morgan Stanley, said before the report. “We believe this quick pace of recovery has lifted capacity utilization rates closer to full – warranting quick action by the central bank.”
Subbarao, who is scheduled to announce policy on April 20, moved today after India’s industrial production gained 6.7 percent in January following a 17.6 percent increase in December from a year earlier, the fastest pace since at least 1994, according to Bloomberg data.
The benchmark wholesale-price inflation rate touched 9.89 percent in February, according to the commerce ministry.
‘Significantly Behind’
“The policy authorities have fallen significantly behind the curve and need to act much more aggressively than they have so far to clamp down on underlying inflation,” Robert Prior- Wandesforde, a Singapore-based economist at HSBC Holdings Plc. said before today’s announcement. “The Indian economy is further advanced in the economic cycle than most people believe.”
India’s $1.2 trillion economy, Asia’s biggest after Japan and China, may expand 8.2 percent in the next fiscal year, compared with 7.2 percent in the year to March 31, the Finance Ministry said in February.
Inflation has returned to Asia as growth accelerates amid the global economic recovery. Consumer prices in China rose to a 16-month high of 2.7 percent in February from a year earlier as industrial production grew 20.7 percent in the first two months of 2010, the most in more than five years. Factory output in Malaysia rose 12.7 percent in January.
‘Financial Imbalances’
Malaysia increased its overnight policy rate, saying it wants to avoid “financial imbalances.” China ordered banks to set aside more deposits as cash last month for a second time while India raised its cash reserve ratio to 5.75 percent from 5 percent in January.
Consumer demand may strengthen further in Asia’s third- largest economy as Hewitt Associates Inc. expects salaries in India to grow at the fastest pace in Asia Pacific in 2010.
Prospects of demand exceeding current capacity in India prompted Honda Motor Co., the world’s biggest motorcycle maker, to say this month that it will invest about 8.9 billion yen ($98 million) to build a second motorcycle plant in the country.
To contact the reporter on this story: Cherian Thomas in Bangalore at Cthomas1@bloomberg.net
Last Updated: March 19, 2010 09:51 EDT