RBI raises rates; more tightening expected – MoneyControl

Posted on March 17, 2011 by

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The (RBI) raised interest rates on Thursday for the eighth time since last March, in line with expectations, and warned both of inflationary pressures and emerging risks to growth.Reserve Bank of India

The RBI said it was likely to maintain its anti-inflationary bias, reinforcing market expectations that further rate increases are in the pipeline, and raised its forecast for headline inflation at the end of March to 8%, from its earlier 7%.

“The underlying inflationary pressures have accentuated, even as risks to growth are emerging. Rising global commodity prices, particularly oil, are a major contributor to both developments,” the central bank said in its midquarter policy review statement.

The RBI raised the repo rate , its main lending rate, by 25 basis points to 6.75%, and raised the reverse repo rate, or borrowing rate, to 5.75%, in line with expectations in a Reuters poll.

“The policy tone is hawkish, prioritising inflation over growth,” said Siddhartha Sanyal, chief India economist at Barclays Capital in Mumbai.

The yield on the most-traded 8.08 percent 2022 bond edged up 2 basis points to 8.08% after the statement, in expectation of more tightening to come, while the benchmark 10-year bond yield rose 4 bps to 7.95%.

The partially convertible rupee reacted little, holding steady at 45.24/25 per dollar.

“We have penciled in plus-25 basis points hike every quarter, with risks that they could do more,” said Radhika Rao, economist at Forecast Pte in Singapore.

“Unfortunately, monetary policy faces the complete burden of anchoring inflationary expectations and risks of generalisation in price pressures seems more glaring than earlier,” she said.

While inflation in India has been driven for much of the past year by rising food prices, it has spread into the broader economy, and the prospect that global oil remains above USD 100 a barrel for a prolonged period adds to inflationary pressure.

The RBI raised rates despite the uncertainty posed by the unfolding disaster in Japan, which has prompted some investors to scale back expectations for rate rises elsewhere.

It said it was too early to assess the macroeconomic impact of the Japan crisis, and said that while spending on reconstruction could provide an economic boost, the substitution of thermal energy for nuclear power in Japan could add further pressure to petroleum prices.

India’s wholesale price index unexpectedly rose in February to 8.3% on an annual basis, data on Monday showed, cementing expectations for a rate increase at Thursday’s mid-quarter policy review.

Standard Chartered this week ratcheted up its forecast for India’s average headline inflation in the fiscal year that starts in April to 7.9%, from 6.5% earlier, citing rising oil and metal prices.

Some economists have also been paring their growth forecasts for the upcoming fiscal year, with higher interest rates starting to take their toll on demand.

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Posted in: India