India Raises Interest Rates

India Raises Rates for Third Time to Curb Inflation

July 2 (Bloomberg) -- India's central bank raised interest rates for the third time this year in an unscheduled announcement as inflation pressures from faster growth outweighs risks from Europe's sovereign-debt crisis.

The Reserve Bank of India increased the reverse repurchase rate to 4 percent from 3.75 percent and the repurchase rate to 5.5 percent from 5.25 percent, according to a statement from the central bank in Mumbai today.

Governor Duvvuri Subbarao moved, even as most central banks in the Asia Pacific are keeping borrowing costs on hold, after the government raised gasoline and diesel prices on June 25, adding to inflation pressure. Australia, South Korea, Indonesia, the Philippines and Thailand kept rates unchanged last month to gauge the impact of the Greece-led debt crisis.

"Price pressures in India remain far too strong to be ignored," Frederic Neumann, an economist at HSBC Holdings Plc, said before the decision. "Growth could be stronger in the coming quarters, lending yet more urgency for rate hikes."

Subbarao acted before the central bank's next scheduled monetary policy announcement on July 27.

India's $1.2 trillion economy expanded 8.6 percent in the three months through March from a year earlier, the fastest pace after China among Asia's major economies. Industrial production surged 17.6 percent in April, beating economists' forecasts.

Stoking Pressures

That's stoking price pressures. India's benchmark wholesale-price inflation unexpectedly accelerated to 10.16 percent in May. Consumer prices paid by industrial and farm workers rose almost 14 percent in May, government data showed.

In contrast, consumer-price gains are running at 2.9 percent in Australia, 5.05 percent in Indonesia and 4.3 percent in the Philippines. The Reserve Bank of Australia left its overnight cash rate target at 4.5 percent and the Bank of Korea kept its key rate at 2 percent in June.

Subbarao opted to tighten borrowing costs today, for the first time since April 20, as inflation concerns mounted, overshadowing the risks to growth from Europe's debt woes.

"The above monetary measures should contain inflation and anchor inflationary expectations going forward, while not hurting the recovery process," the central bank said.

The government's move to increase gasoline prices by 3.5 rupees (7.5 cents) and diesel costs by 2 rupees may boost the wholesale-price inflation rate by 1.3 percentage points, according to JPMorgan Chase & Co. economist Jahangir Aziz.

"It's inflation that India needs to worry about rather than Europe's debt crisis," N.R. Bhanumurthy, an economist at the New Delhi-based National Institute of Public Finance and Policy, said before the announcement. "India's economy is driven more by domestic factors."

Debt Loads

India's exports to Greece, Portugal and Spain, which are struggling with debt loads, account for about 4 percent of the nation's overseas sales, according to Indian Commerce and Industry Minister Anand Sharma.

The Organization for Economic Cooperation and Development on May 26 forecast that India's economy will grow 8.3 percent in 2010 and 8.5 percent in 2011 from 6.6 percent last year.

Pressure increased on Subbarao to move rates higher with Chakravarthy Rangarajan, chairman of the Prime Minister's Economic Advisory Council, saying on June 17 that inflation is at an "uncomfortable" level and some action by the Reserve Bank was called for.

Inflation is a politically sensitive issue in India, where the World Bank estimates more than three-quarters of the nation's 1.2 billion people live on less than $2 a day.

Shortage of Money

Subbarao tightened monetary policy even as the banking system faced a shortage of money.

Cash availability dropped after businesses withdrew money to pay quarterly tax and the government raised 1.06 trillion rupees ($23 billion) from the auction of high-speed mobile phone permits and broadband internet airwaves to companies including Bharti Airtel Ltd.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net