Monday, May 2, 2011

India set for ninth rate hike to cool inflation

AFP - India, which has the highest inflation of any large Asian economy, looked set on Tuesday to hike interest rates for a ninth time as it struggles to clamp down on inflation.

The central bank, which warned Monday of the "risk to growth from sustained high inflation," has raised rates eight times since March 2010, albeit in gradual, quarter-point steps to minimise the impact on economic growth.

But inflation has remained high and some economists expect Reserve Bank of India (RBI) policymakers to move more aggressively when they meet Tuesday.

"A 50-basis-point rate rise wouldn't surprise me -- inflation is proving stubbornly difficult to reduce," Deepak Lalwani, head of London-based India investment consultancy Lalcap, told AFP.

"It's time to step it up," agreed HSBC chief India economist Leif Eskesen.

Others bet the bank will stick to its "slowly, slowly approach" and only hike by a quarter point as it seeks to balance growth and inflation concerns.

The RBI meeting comes after data in April showed inflation had surged to nearly nine percent.

The central bank said in a report on the economy released Monday that it was important for monetary policy "to ensure a low inflation environment as a pre-condition for sustained high growth," stoking expectations of a rate hike.

It also warned that rising global energy and commodity prices may fuel inflationary pressures "and constitute significant medium-term risk."

The Asian Development Bank has said controlling inflation must be the Asian region's top priority as strong growth, turmoil in the Middle East and Japan's nuclear crisis drive up food and oil prices.

Asian economies from South Korea, Indonesia, Taiwan to China are all battling inflationary pressures.

But some economists are concerned that India's central bank may push too hard on the brakes.

The benchmark repurchase, or repo rate, at which the bank lends to commercial banks, is 6.75 percent while the reverse repo, paid to banks for deposits, is 5.75 percent.

"The bottom line is the central bank needs to act but it should not go overboard," said CLSA economist Rajeev Malik. "It must avoid a repeat of the mid-1990s outcome of killing inflation by crippling growth."

The government has said it expects the economy to expand by nine percent in the current fiscal year, returning to levels it reached before the global financial crisis.

But there are already fears that Asia's third-largest economy will undershoot the target because of interest rate increases.

Investment house Goldman Sachs has slashed its growth forecast for the year to March 2012 to 7.8 percent from 8.7 percent. Credit Suisse has trimmed its expansion forecast to 7.5 percent.


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