India Central Bank Raises Interest Rates a Fifth Time

India Raises Interest Rates a Fifth Time to Contain Inflation

Sept. 16 (Bloomberg) -- India's central bank Governor Duvvuri Subbarao raised interest rates for the fifth time this year as strengthening economic growth threatens to increase inflationary pressure.

The Reserve Bank of India raised the repurchase rate to 6 percent from 5.75 percent and the reverse repurchase rate to 5 percent from 4.5 percent, it said in an e-mailed statement in Mumbai today. The quarter-point increase in the repo rate was predicted by 11 of 16 economists surveyed by Bloomberg News, while 2 expected the half-point gain in the reverse rate.

Subbarao is under pressure to tame prices after millions of workers went on strike over the hit to spending power from inflation, which remains among the world's highest even as it eased for a fourth month in August. Today's move extends Asia's most aggressive round of rate increases and contrasts with pauses by New Zealand, Malaysia and South Korea this month amid concern the global rebound is cooling.

"Persistent high inflation is the most important challenge for India and I don't think the RBI would derive any comfort from the fact that other countries are not raising rates," Gaurav Kapur, a Mumbai-based economist at Royal Bank of Scotland, said before the decision. "India has altogether different growth and inflation dynamics."

Economic reports in the past week indicated both a pick-up in growth and moderation in prices. Industrial production expanded 13.8 percent in July from a year earlier, more than twice the pace in June. India's merchandise exports increased 22.5 percent from a year earlier to $16.6 billion in August, Commerce Secretary Rahul Khullar said yesterday.

Inflation Slows

India's accelerating economy has lifted incomes and stoked demand for Maruti Suzuki India Ltd. cars, TVS Motor Co. motorbikes and other goods, helping Maruti Suzuki, the nation's biggest carmaker, sell a record 104,791 vehicles last month.

Still, wholesale prices rose 8.5 percent in August from a year earlier, easing from July's 9.8 percent gain, the commerce ministry said Sept. 14.

Prime Minister Manmohan Singh's government has signaled increased acceptance of higher borrowing costs amid public protests over inflation, which most affects the three quarters of the population who live on less than $2 a day.

India needs to "continue to be vigilant and be prepared with the instruments of fiscal and monetary policy to use them as and when the need arises" to contain inflation, Finance Minister Pranab Mukherjee said Sept. 14. "There is no room for complacency."

Neutral Levels

At the same time, one gauge of the outlook for rates suggests Subbarao may be approaching the end of the series of increases. The cost of fixing rates on money for three years in the market for so-called interest-rate swaps tumbled 37 basis points in August, the most in 20 months.

Nomura Holdings Inc., Japan's biggest brokerage, forecast before today's decision that this week's increase would be the last in the year through March.

Even so, "extremely loose fiscal and monetary policy has pushed growth above the near-term capacity," resulting in rising inflation expectations, Singapore-based Morgan Stanley economist Chetan Ahya said before the decision. "The RBI needs to lift rates towards neutral levels over the next six months."

Gross domestic product expanded 8.8 percent last quarter from a year earlier, the most among major economies after China and Brazil. Consumer prices paid by industrial and rural workers in India are rising more than 11 percent, faster than the consumer inflation in any other Group of 20 nation.

Workers Strike

Worker unions, supported by the opposition communist parties, organized a nationwide strike on Sept. 7 to protest rising prices and state asset sales, prompting millions to stay away from work and forcing banks to shut offices in some cities and airlines to cancel flights.

Today's meeting is the first of an expanded series of RBI meetings to consider monetary policy. The bank previously met quarterly, and has now increased that to eight times a year.

As India's role in the global economy rises, the central bank is also examining how it conducts monetary policy. The RBI has used banks' reserve requirements along with the repo and reverse repo rates to manage liquidity and price pressures in the past year.

The RBI set up a panel this week to review its tools, including the difference between the repo and reverse-repo rates, which are respectively used to inject or remove funds from the system.

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