India’s central bank increased interest rates for the eighth time in a year after raising its inflation forecast twice in three months. Stocks and bonds fell.
The Reserve Bank of India raised the repurchase rate to 6.75 percent from 6.5 percent, according to an e-mailed statement today. All 26 economists in a Bloomberg News survey had predicted the decision. It boosted the reverse repurchase rate to 5.75 percent from 5.5 percent.
Governor Duvvuri Subbarao extended the steepest rate increases among Asia’s major economies after the government last month unveiled plans to lower taxes and boost spending. The Reserve Bank also has to contend with the impact of higher oil prices on inflation, which cuts purchasing power in a nation where the World Bank says more than three-quarters of the people live on less than $2 a day.
“The RBI needs to tighten more to bring inflation under control,” said Devika Mehndiratta, a Singapore-based economist at Credit Suisse Group AG. “Price pressures are building up quite sharply.” Mehndiratta expects a half-point increase in rates by September.
The Bombay Stock Exchange’s Sensitive Index has slid about 11 percent this year, the most in Asia after Japan, where stocks have plunged after last week’s strongest earthquake on record triggered a tsunami and nuclear crisis.
The index fell 0.8 percent at 1:10 p.m. in Mumbai. India’s 11-year bond yields rose one basis point to 8.09 percent, while the rupee weakened 0.2 percent to 45.19 per dollar.
India’s key wholesale-price inflation quickened to 8.31 percent in February, led by manufactured product costs. The Reserve Bank today raised its March-end inflation forecast to 8 percent from 7 percent, according to the statement.
“The underlying inflationary pressures have accentuated, even as risks to growth are emerging,” the central bank said in the statement. “As domestic fuel prices are yet to adjust fully to global prices, risks to inflation remain clearly on the upside, reinforced by the persistence of demand-side pressures.”
The benchmark inflation rate in India is the highest after Russia among the so-called BRIC nations including Brazil and China. It is more than China’s 4.9 percent and Brazil’s 6.01 percent and compares with 9.5 percent in Russia.
Subbarao’s eight rate increases in the past year compare with three in China and four in South Korea. Indonesia lifted its reference rate last month for the first time this year after opting not to join counterparts in boosting rates in 2010.
India’s central bank on Jan. 25 estimated inflation would be 7 percent by the end of March as winter harvests curb food-price increases. Food inflation was 9.4 percent in the week ended March 5, the slowest in three months.
Manufacturing inflation accelerated to 4.9 percent in February from 3.8 percent in January, government data showed this week. The cost of manufactured products accounted for 36 percent of the Indian inflation rate in February compared with 27.5 percent in the previous month, signaling growing demand.
“The concern is the change in the drivers of inflation from food to manufacturing, suggesting inflation is becoming more generalized,” Jay Shankar, Mumbai-based chief economist at Religare Capital Markets Ltd., said before the decision. “That will require more aggressive tightening.”
Car sales in India by companies including Maruti Suzuki India Ltd., the nation’s biggest carmaker, and Toyota Motor Corp. surged to a record in February as consumers spent more.
General Motors Co.’s India unit, which had raised prices by as much as 2 percent in January, may boost them again by the end of this month, Karl Slym, head of the Detroit-based company’s local unit, said in an interview with Bloomberg News on March 4.
India’s $1.3 trillion economy may expand by as much as 9.25 percent in the fiscal year starting April 1, the fastest pace since 2008, the finance ministry forecast last month.
Demand may strengthen after Finance Minister Pranab Mukherjee’s budget for the next fiscal year proposed increasing spending by 13.4 percent to 12.6 trillion rupees ($278.4 billion). It also includes plans to exempt incomes below 180,000 rupees from tax, higher than the previous threshold of 160,000 rupees.
Prime Minister Manmohan Singh’s coalition is aiming to put more money in the hands of voters to help them cope with rising prices and shore up support for five state elections this year.
“Hopes of any moderation have been dashed month after month as sources of elevated inflation have either proved stubborn or have been replaced by fresh pressure,” Samiran Chakraborty, Mumbai-based economist at Standard Chartered Plc, said before the decision. “The recent spike in global crude prices is the latest addition.”
Crude oil climbed to a 29-month high settlement price of $105.44 a barrel in New York on March 7 as fighting between Libyan rebels and forces loyal to Muammar Qaddafi escalated, shutting ports and turning away tankers.
It has dropped 2.4 percent to $98.77 since the March 11 earthquake in Japan on speculation the natural disaster will cut demand in the world’s third-largest crude user.
“Oil prices continue to pose huge headwinds for inflation management,” Namrata Padhye, a Mumbai-based economist at IDBI Gilts Ltd., said before the statement. “Prices have softened a bit due to the Japan quake, but they are still hovering around $100 a barrel, which is a real cause for concern.”