• Inside Labour

    Terry Bell explores the connection between poultry, poverty and desperation.

  • A new ANC sweeper?

    Have the Guptas' new auditors mastered how to look the other way on cue, asks Solly Moeng.

  • Strategy for the big boys

    Formulating strategy across the span of huge companies is a marathon, says Ian Mann.

All data is delayed
See More

India hikes interest rates

Jun 16 2011 10:05

Mumbai - India's central bank on Thursday raised its key short-term interest rates by 25 basis points - its 10th hike in 16 months - in a bid to tame high inflation stuck at "uncomfortable levels."

The Reserve Bank of India raised its repo rate - at which it lends to commercial banks - to 7.50% and increased the reverse repo - the rate it pays to banks for deposits - to 6.50%.

The repo rate is now at its highest since November 2008.

"Inflation persists at uncomfortable levels and much above our comfort zone," the RBI governor Duvvuri Subbarao said in a statement released after bank policymakers met in Mumbai.

The central bank decision came after data this week showed annual inflation accelerated to a higher-than-expected 9.06% in May, from 8.66% the previous month.

This is well above the RBI target of 5.0-6.0%.

Subbarao maintained a hawkish tone, saying a short-run slowdown in growth may be unavoidable as the bank maintains its "anti-inflationary" monetary policy stance.

Analysts had expected the increase and say further hikes are still likely in coming months.

India's Sensex opened lower before the meeting, as investors sold heavily in anticipation of a hike.

The benchmark 30-share index on the Bombay Stock Exchange was 0.45% lower in early afternoon trade after the announcement. Interest-sensitive banking, real estate and auto stocks in particular were under pressure.

The surge in the cost of living, triggered by spiralling food prices, rising global commodity prices and higher fuel costs, has been one of the biggest headaches for India's government.

Economists say inflation has now spilled over into the general economy, pushing up wages and other costs.

"The headline inflation rate remains extremely sticky at around the double-digit mark," said Robert Prior-Wandesforde, India and South East Asia Economics head at Credit Suisse.

Reducing prices has become a political priority for the Congress-led coalition in New Delhi, even as higher growth is seen as key to reducing crushing poverty in the nation of 1.2 billion.

The government has delayed a decision to rise prices of diesel and kerosene, which is widely used in rural areas and is seen as the "poor man's fuel".

A possible hike in diesel would stoke inflation further, as it is a widely used in the transport of goods and services across the country.

The RBI on Tuesday said inflation was likely to face continued "upward pressure" from the impact of high oil and coal prices, government subsidy expenditure and wage rises.

While inflation has remained stubbornly high, the series of rate hikes is starting to have an impact, with India's economic growth slowing to 7.8 percent in the three months to March - its weakest pace in five quarters.

interest rates  |  inflation


Read Fin24’s Comments Policy

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
Comments have been closed for this article.

Company Snapshot

We're talking about:


Marketing is a big concern in SA's small business community, followed by a lack of confidence and partnering with the wrong people, according to a survey.

Money Clinic

Money Clinic
Do you have a question about your finances? We'll get an expert opinion.
Click here...

Voting Booth

The drop in inflation:

Previous results · Suggest a vote