June 11, 2008 / 1:32 PM / 11 years ago

RBI raises key rate to curb inflation

MUMBAI (Reuters) - The Reserve Bank of India (RBI) raised its key lending rate for the first time in more than a year on Wednesday, and economists saw more policy tightening to come as a recent rise in state-set fuel prices threatened near double-digit inflation.

Indian police guard the Reserve Bank of India building in Mumbai in this April 29, 2003 file photo. The RBI raised its key lending rate for the first time in more than a year on Wednesday. REUTERS/Roy Madhur/Files

The RBI said it was lifting the repo rate by 25 basis points to 8.0 percent to contain inflation expectations, with annual inflation already at 3-1/2 year highs above 8 percent.

Dealers said the unexpected decision, which came after the markets closed, would send the 10-year government bond yield up 10-15 basis points to its highest in a year when trading started on Thursday and help stall a recent slide in the rupee.

The repo rate rise is the first since March 2007 and follows a sharp increase in state-set fuel prices last week, which analysts expect to push wholesale price inflation, India’s most closely watched price measure, to 13-year highs above 9 percent.

India is not the only country battling inflation, as soaring food and record oil prices push up costs around the world. In Asia, central banks in China, Indonesia and the Philippines have tightened policy in the past week.

“There has been a sharp pick up in WPI and CPI (wholesale and consumer price inflation). Fuel prices were raised last week, which would add to inflation,” said Lehman Brothers economist Sonal Varma.

“Clearly, this move will add to the downside risk to economic growth,” she said.

India’s economy has grown at 9 percent or more for the past three fiscal years, but the RBI expects growth to moderate to 8.0-8.5 percent in the fiscal year ending March 2009.

Dealers expect 10-year bond yields to rise by 10-15 basis points from Wednesday’s close of 8.26 percent. The partially convertible rupee ended at 42.86/87 per dollar on Wednesday and has fallen 8 percent so far this year.

MORE TO COME

The reverse repo rate, the rate at which the central bank absorbs cash from the market, was left unchanged at 6.00 percent.

The cash reserve ratio (CRR), which has been the central bank’s main policy tightening instrument over the past 18 months, was also left unchanged.

The repo rate is at its highest since November 2002 and analysts said more tightening was likely.

“We expect a reverse repo rate hike by 25 basis points as well, and another 75 basis point CRR hike by year-end,” said Standard Chartered Bank economist Shuchita Mehta.

“Inflation will remain high in the near term and may peak at about 9.5 to 10 percent for the June period and then taper off. But it will stay above 8 percent through the year.”

The RBI’s next scheduled policy review is on July 29.

Additional reporting by Swati Bhat

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