India Raises Interest Rates for a 10th Time Since 2010 to Tame Inflation

India’s central bank raised interest rates for the 10th time since the start of 2010, extending the longest streak of monetary tightening in a decade after inflation accelerated. Stocks and rupee fell.

The Reserve Bank of India increased the repurchase rate to 7.50 percent from 7.25 percent, according to an e-mailed statement today. Nineteen of 20 economists in a Bloomberg News survey predicted the decision, while one expected no change.

India joins nations from China to South Korea in stepping up the fight against surging living costs, with the central bank signaling today it will continue to raise rates. Accelerating inflation has contributed to a 12 percent decline in the benchmark stock index in Mumbai this year, Asia’s worst drop, on concern the policy will hurt economic expansion.

“Demand pressures need to be damped to ensure that inflation doesn’t become a structural problem in India,” said Anubhuti Sahay, a Mumbai-based economist at Standard Chartered Plc. “Even though growth is moderating, uncomfortably high inflation won’t give the RBI any respite in the near future.”

The Bombay Stock Exchange’s Sensitive Index declined 0.8 percent at the close of trading in Mumbai, while the rupee weakened 0.3 percent to 44.91 per dollar. The yield on the 7.80 percent bond due in April 2021 slid 10 basis points, or 0.10 percentage point, to 8.30 percent.

‘Inflation Risks’

The Reserve Bank said in the statement “domestic inflation risks remain high,” adding “some short-run deceleration in growth may be unavoidable in bringing inflation under control.”

India’s key wholesale-price inflation quickened to 9.06 percent in May from 8.66 percent in April.

Chakravarthy Rangarajan, the top economic adviser to Indian Prime Minister Manmohan Singh, said June 14 the central bank needs to further tighten policy to curb price gains, which undermine spending power in a nation where the World Bank says three-quarters of the people live on less than $2 a day.

In China, policy makers on June 14 increased lenders’ reserve requirements to drain cash from the economy after consumer prices rose 5.5 percent in May, the biggest jump since 2008. China has so far boosted interest rates four times since September and allowed the yuan to gain about 1.6 percent against the dollar this year. South Korea has raised borrowing costs three times this year.

Slowing Demand

“Certainly in India, you’re seeing the first signs of slowing in consumption demand,” Raghuram Rajan, a professor at the University of Chicago and a former chief economist at the International Monetary Fund, said in Singapore yesterday. “So long as fiscal policy cooperates, you should see some slowing into the rest of this year and hopefully a softer landing.”

Finance Minister Pranab Mukherjee has pledged to narrow India’s budget deficit to 4.6 percent of gross domestic product in the year ending March 31 from 4.7 percent in the previous 12 months.

India’s factory production growth eased in April, with output rising 6.3 percent from a year earlier after an 8.8 percent gain in March, the statistics office said last week. The nation’s gross domestic product rose 7.8 percent in the three months ended March 31 from a year earlier, the weakest pace in five quarters, government data show.

Price Outlook

Rate increases in India will slow growth this year and help ease inflation to 6 percent “with an upward bias” by March 31, 2012, central bank Governor Duvvuri Subbarao said May 3. India’s economy may expand “around 8 percent” in the year through March from 8.5 percent in the previous 12 months, he estimated.

Subbarao today reiterated he is willing to risk a slowdown in growth to curb price pressures.

The rising cost of inputs such as palm oil is squeezing profits, said P. Ganesh, Mumbai-based executive vice-president of finance at Godrej Consumer Products Ltd. (GCPL), an Indian maker of soaps and detergents.

“We were forced to increase prices twice since January because of higher raw-material prices,” Ganesh said in an interview on June 13. “If raw-material prices remain high, there will be industry-wide pressure to hike prices.”

Street Protests

Thousands of workers from across India marched toward parliament in New Delhi in February protesting against rising prices and low wages. The main opposition Bharatiya Janata Party organised a rally against inflation and corruption on May 16 in the nation’s capital.

Climbing food costs may add to inflation after Prime Minister Singh’s coalition increased the prices it pays farmers for grains and oilseeds. The federal government sets the crop prices to assure farmers’ incomes, while selling subsidized grains and cooking oils to the poor.

India also plans to allow state-run refiners such as Indian Oil Corp. to increase diesel tariffs. A panel of Indian ministers will meet “shortly” to consider raising fuel costs, Oil Minister S. Jaipal Reddy said June 13. The state-run refiners had a revenue loss of 450 billion rupees ($10 billion) in the first quarter from selling fuel below cost, Reddy said.

“Despite the slowdown in growth, elevated inflation remains a worry,” Rohini Malkani, a Mumbai-based economist at Citigroup Inc., said before the report. “With the RBI prioritizing inflation over growth, we expect a further 25 to 50 basis points increase during the course of 2011.”

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

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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