INDIA’S central bank has raised interest rates for the 12th time in 18 months to combat near double-digit inflation, despite indications of a slowdown in economic growth.
The Reserve Bank of India (RBI) raised its repo rate, at which it lends to commercial banks, by a quarter percentage point to 8.25 per cent and increased the reverse repo – the rate it pays to banks for deposits – to 7.25 per cent.
After a meeting of policymakers in the financial capital Mumbai, RBI governor Duvvuri Subbarao said that the move was necessary because inflation remained high and well above the bank`s "comfort zone" of around five per cent.
Consumer prices rose at their quickest pace in more than a year last month.
Subbarao said that it was "imperative to persist with the current anti-inflationary stance", adding that future rate decisions will be based on "signs of downward movement in the inflation trajectory".
The RBI has said that it is prepared to fight inflation even at the cost of economic growth.
The repo rate is now at a near three-year peak and the reverse repo is at its highest level in more than a decade. Overall, India has the highest inflation rate of any large Asian economy.
However, latest data show the blistering pace of growth in Asia`s third largest economy is slackening.
Industrial output grew just 3.3 per cent year-on-year in July – it is slowest in nearly two years.
And last month, India posted its slowest gross domestic product (GDP) growth in six quarters, rising 7.7 per cent year-on-year, as expansion was hit by the monetary tightening.
A rash of interest rate rises has dampened consumer demand in a range of sectors from cars to property, making loans costlier and spelling further bad news for the business community.
Business leaders have urged the central bank to put rates on hold, fearing inflation and a lack of important economic reforms could hit further investment and cut growth.
Deepali Bhargava, chief India economist at Espirito Santo Securities, said: "This hike should mark the peaking of the rate increase cycle."
