MUMBAI (AFP) – The Reserve Bank of India raised its key short-term borrowing rate by a quarter percentage point to 7.50 percent citing inflation risks as it also hiked its full-year growth forecast.
The central bank however kept other rates unchanged including its overnight deposit rate at 6.0 percent after inflation hit 6.12 percent in January.
“The objective will be to bring inflation as close as possible to the 5.0-5.5 percent rate at the earliest,” the central bank said in its policy review released Wednesday.
The central bank raised its full-year growth forecast for the year to March 2007 to 8.5 to 9.0 percent from an earlier forecast of above 8.0 percent.
The Mumbai stock exchange Sensex index was volatile Tuesday and was down 114.52 points or 0.81 percent to 14,097.4 in late afternoon trade.
Prices in India are now well above the annual rise of 5.0 to 5.5 percent expected by the central bank for the year ended March which had led analysts to expect rate increases in both short-term rates.
The decision to keep the deposit, or reverse repurchase rate, at 6.0 percent is a balancing act, analysts said, that allows banks to lend money to consumers and companies rather than park funds with the central bank.
The repurchase rate hike makes borrowing more expensive so fast credit growth, already up 30 percent this year and double central bank estimates, is constrained.
“The bank appears to have taken a cautious approach and is waiting to see how recent measures will help curb inflation,” said an analyst with Prabhudas Lilladher on condition of anonymity.
In October the central bank warned the economy showed signs of overheating and raised its repurchase rate by a quarter percentage point, to 7.25 percent and kept its reverse repurchase rate at a four-year high of 6.0 percent.
A rise in food prices particularly has become a sensitive political topic in the country where almost two-thirds of the population live near or below the poverty line of two dollars a day.
Since it began its tightening cycle in late 2004, the central bank has been using a variety of tools to fight inflation.
In December, it boosted the amount of money that banks must keep with the central bank, raising the cash reserve ratio, or CRR, by 50 basis points to 5.5 percent in a bid to suck out liquidity, or cash from the banking system and tame credit growth.
Central bank Governor Y.V. Reddy said he expected the higher cash ratio “will work towards containing inflation.”
Analysts said that if inflation remains high, Reddy’s comments may mean another hike in the cash ratio.
“Our view is that the Reserve Bank will continue to use CRR as a tool to provide appropriate liquidity,” said Rajeev Malik, Asia economist with JP Morgan Chase, based in Singapore.
The surging economy, which grew a record 9.1 percent in the first half ended September, prompted Standard and Poor’s to raise the country’s credit rating to investment grade on Tuesday.
The move paves the way for global funds prohibited from buying debt labelled as junk to invest in government bonds and other debt in the country.
The last time the country had a stable investment grade rating was in September 1990, about a year before it faced near default on foreign currency debt as reserves shrunk to around one million dollars.