MUMBAI: Reserve Bank of India, India’s central bank, raised its key short-term lending rate on 31 January 2007 to its highest in nearly four years, as expected, to rein in inflation and temper strong demand for loans in Asia’s fourth-largest economy.
It raised the lending rate, known as the repo rate, to 7.50 per cent from 7.25 per cent, its highest since March 2003, but kept its benchmark borrowing, or reverse repo, rate unchanged at 6.0 per cent.
“To the extent the current inflationary pressures are attributable to monetary conditions, it is essential to undertake appropriate measures, in continuation of those already taken and in the light of anticipated developments,” the Reserve Bank of India (RBI) said in its quarterly monetary policy review.
Fourteen out of 15 analysts polled by Reuters had expected the central bank to raise both the repo and reverse repo rate by 25 basis points to try to calm inflation and strong loans growth in the fast-expanding economy.
“They are aware of the fact that too much tightening may deflate the growth momentum in the economy and they don’t want to upset that,” said Anant Krishnamurthy, co-head of global markets at HSBC India.
At 12:48 p.m., the benchmark 10-year federal bond yield was at 7.74 percent, down seven basis points from before the rate decision, and the partially convertible rupee was steady at 44.16 per dollar.
The central bank raised its main lending rate four times in 2006 -- the last time on October 31 -- to try to ease price pressures. It also increased the key borrowing rate three times.
In December, it also raised the amount of cash banks have to keep on deposit with it as it sought to curb annual credit growth of about 30 percent.
It left this rate, known as the cash reserve ratio, unchanged at 5.5 percent on Wednesday and held the bank rate at 6.0 percent.
Headline wholesale inflation, India’s main measure, is running at an annual rate of 5.95 per cent, down from a two-year high of 6.12 per cent in early January.
Still, it is running above 5.0-5.50 per cent, the central bank’s estimate for annual inflation at the end of the fiscal year in March.
The decision comes a day after international rating agency Standard & Poor’s raised India’s credit rating to investment grade from speculative grade, citing strong economic prospects and an improving fiscal situation.
The central bank raised its forecast for 2006-07 GDP growth to 8.5-9.0 percent from a previous forecast of around 8 percent. Ahead of the review, the government had revised the growth rate for 2005/06 up to 9.0 percent from 8.4 percent.
The government has also taken measures to try to combat inflation, such as by cutting import duty on cement, steel, aluminium, some edible oils and maize.