Rajan Raises India Benchmark Rate Again to Fight Inflation

India’s central bank raised its benchmark interest rate for the second straight month to fight accelerating inflation, while further easing emergency liquidity curbs that were imposed in July to support the rupee.

Governor Raghuram Rajan boosted the repurchase rate to 7.75 percent from 7.5 percent, the Reserve Bank of India said today, as 32 of 42 analysts in a Bloomberg News survey predicted. He cut the marginal standing facility rate to 8.75 percent from 9 percent, making short-term funds cheaper for banks following a July cap on borrowing at the repurchase rate.

Consumer prices are climbing almost 10 percent even as economic growth slows, hurting the roughly 800 million Indians living on less than $2 per day as the cost of everything from onions to clothing surges. The rupee pared losses after today’s decision, which Rajan said seeks to quell inflation pressures. Pramerica Asset Managers Pvt. and Crisil Ltd. expect another increase in borrowing costs at the next meeting in December.

“Rajan has made it clear he will not play to the gallery and his priority is inflation,” said Mahendra Jajoo, Mumbai-based chief investment officer at Pramerica. “He’ll continue to raise rates until price pressures come down.”

The rupee, down 12 percent against the dollar over the past year, erased losses after the decision and was 0.2 percent stronger at 61.385 per dollar as of 4:08 p.m. in Mumbai. The S&P BSE Sensex rose 1.7 percent. The yield on the 10-year government bond fell to 8.57 percent from 8.66 percent yesterday.

More Increases

“We can’t live with close to double-digit CPI for an extended period of time,” Rajan said in a briefing in Mumbai, referring to consumer-price inflation. The index’s climb is set to moderate to a pace below 9 percent by the end of March next year following the RBI’s rate actions, he said.

The central bank may increase the repo rate to 8 percent at the policy review due Dec. 18, according to Pramerica and Crisil, the local unit of Standard & Poor’s.

Rajan could boost the benchmark as much as 50 basis points by the end of March 2014, said U.R. Bhat, Mumbai-based managing director of Dalton Capital Advisors India Pvt., a unit of U.K.- based Dalton Strategic Partnership LLP that has about $2 billion in assets globally.

“It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth,” Rajan said in today’s statement.

Inflation Focus

The policy stance seeks to manage inflation expectations in a situation of weak expansion, and the central bank will “closely monitor inflation risk while being mindful of the evolving growth dynamics,” he said.

The RBI today also increased some liquidity provided to the banking system.

The rupee has appreciated 9.3 percent since Sept. 4, when Rajan announced concessional swaps windows for banks to attract dollars. The RBI has garnered $12.1 billion so far from that step, he said in the briefing. The currency’s climb in the period is the biggest gain in the world.

“Rajan is clearly focused on getting inflation firmly under control and maintaining the rupee’s stability,” said Gaurav Kapur, a senior economist at Royal Bank of Scotland Group Plc in Mumbai. “With interest rates going up since July, growth will be negatively affected.”

The central bank said wholesale-price inflation is expected to remain higher than current levels through most of the remaining part of the year, with consumer inflation probably remaining around or above 9 percent.

Slowing Growth

The projection for economic growth in the 12 months that began April 1 was lowered to 5 percent from 5.5 percent.

Consumer prices advanced 9.84 percent in September from a year earlier, the most in a basket of 17 Asia-Pacific economies tracked by Bloomberg. Wholesale inflation was 6.46 percent. Food, fuel and import costs have fanned price pressures.

Rajan, 50, unexpectedly raised the repo rate by a quarter point in his first policy review on Sept. 20. He’s lowered the marginal standing facility rate from 10.25 percent, the level reached when his predecessor boosted it 200 basis points on July 15 to curb the supply of rupees.

Banks borrow in the marginal standing facility window when they exhaust the amount they can access at the repo rate.

One respondent in Bloomberg’s repo rate survey expected an increase to 8 percent today and the rest saw no change.

Exports, Investment

Rajan reiterated that India’s expansion may be set to accelerate, helped by farm output, exports and Prime Minister Manmohan Singh’s efforts to speed up implementation of major investment projects. Singh faces a general election by May.

Economic expansion will slow to 4.7 percent this fiscal year, from 5 percent in the previous 12-month period, according to the median estimate in a Bloomberg survey of 28 analysts from Sept. 27 through Oct. 3. That would be the slowest since 2003.

For now, Indian companies such as carmakers are grappling with conditions akin to stagflation.

“Any increase in the repo rate obviously is not good for the car industry,” said Ajay Seth, chief financial officer at Maruti Suzuki India Ltd., the nation’s largest carmaker. Inflation seems to be the bigger concern for officials, he said.

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