INDIA’S inflation-fighting central bank on Tuesday (October 25) raised interest rates by a quarter-point, the 13th hike since March last year, while warning of a further economic slowdown this year.
But the Reserve Bank of India (RBI) gave a strong signal that this could be its last rate hike this year, which will calm the nerves of business leaders long concerned about their impact on investment and growth.
“The likelihood of a rate action in the December mid-quarter review is relatively low,” RBI Governor Duvvuri Subbarao said in a statement on the bank’s website.
“If the inflation trajectory conforms to our projections, further rate hikes may not be warranted.”
The bank sees inflation slowing to 7.0 per cent by March next year.
The latest interest rates rise takes the RBI’s repo rate at which it lends to commercial banks to 8.50 per cent and increases the reverse repo – the rate it pays banks for deposits – by the same level to 7.50 per cent.
Top industry bodies the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Confederation of Indian Industry (CII) welcomed the signal of a pause in rate increases.
“Overall, FICCI is relieved to see a halt in the cycle of interest rate increases and urges the Government to take further steps that will restore investors’ confidence in coming months,” Secretary-General Rajiv Kumar said.
India’s finance minister Pranab Mukherjee also voiced concerns about the impact of the latest hike on growth.
The RBI revised its estimates for Gross Domestic Product (GDP) growth in the current financial year to 7.6 per cent, down from an earlier 8.0 per cent.
Mukherjee said that the decision “would help in getting us back to a more comfortable inflation situation soon while leaving scope for growth to pick up in the second half of the current fiscal year”.
Reducing prices has become a political priority for India’s government, with higher growth seen as key to reducing crushing poverty in the nation of 1.2 billion.
The country’s benchmark wholesale price index – the government’s most watched cost-of-living monitor – has been stubbornly high at 9.72 per cent in September, marginally down from 9.78 per cent the previous month.
That is well above the central bank’s comfort zone of 6.0 per cent and marks the highest inflation rate among the world’s major economies.
The surge in inflation was initially triggered by spiralling food prices and then exacerbated by rising global commodity prices and higher fuel costs.
The RBI is on its longest streak of monetary tightening in a decade and is on record as saying that short-term economic growth may have to be sacrificed to fight inflation, which it describes as “sticky and persistent”.
India’s repo rate is at a near three-year high and the reverse repo is at its highest level in more than a decade.
Analysts, who widely expected the latest hike, said the increase could mark the peak of India’s rate cycle.
The RBI may start lowering rates only well into the next year, possibly from April onwards, after inflation has moderated, they said.
“We appear to be at the end of the tightening cycle,” said Shubhada Rao, chief economist at private Yes Bank.
Economic indicators show that India’s breakneck pace of growth is slowing as borrowing costs rise, with the country’s industrial output rising just 3.3 per cent year-on-year in July – the slowest in nearly two years.
The rash of interest rate rises has weakened consumer demand in the ongoing festive season across a range of sectors, from cars to property, as loans become costlier while disposable incomes remain low amid spiralling costs.
Global consultancy Ernst and Young said on Monday (October 24), however, that India’s economy would grow at 9.5 per cent in 2013 – 0.5 per cent higher than China.