India Raises Interest Rates

To get a handle over headline inflation, the Reserve Bank of India has raised its benchmark interest rate to 8 percent from 7.5 percent.

 

“Today’s policy action will reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required,” says Governor Duvvuri Subbarao. “A change in stance will be motivated by signs of a sustainable downturn in inflation.”

 

India’s benchmark wholesale-price inflation, which quickened to 9.44 percent in June, may remain near 10 percent until November, according to HSBC Holdings Plc and Yes Bank Ltd.

 

India has raised its rates 11 times since the start of last year.

 

The RBI also cited a high share of production capacity in use, risk of a “wage-price spiral” and “stickiness” in food prices contributing to inflation pressures.

 

Subbarao blames the government for contributing to inflation, which erodes the purchasing power of a population where more than three-quarters of the people live on less than $2 a day. A “large fiscal deficit” is stoking price pressures, the central bank said.

 

“Going forward, the monetary policy stance will depend on the evolving inflation trajectory, which in turn, will be determined by trends in domestic growth and global commodity prices,” India’s central bank said in a statement.

 

 

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