India leaves rates unchanged, hikes cash reserve ratio
Saturday, 30 January 2010
MUMBAI, Jan 29 (AFP): India's central bank kept interest rates on hold Friday but moved to drain excess liquidity from the banking system in an effort to tame surging inflation without hurting economic recovery.
The Reserve Bank of India (RBI) boosted its cash reserve ratio-the sum commercial banks keep on deposit-by a higher-than-expected 75 basis points to 5.75 percent as it looked to counter "inflationary expectations."
India is trying to perform a delicate balancing act of tackling high annual inflation, which is running at 7.31 percent due to soaring food costs, while keeping growth on track in Asia's third-largest economy.
The two-stage increase in the cash reserve ratio -- 25 basis points higher than analysts' forecasts-will suck 360 billion rupees (7.7 billion dollars) from the banking system.
The rise was seen as a move toward monetary tightening after a period of aggressive easing to shield India from the global slump.
The RBI also hiked its growth forecast for the fiscal year to March to 7.5 percent from a previous target of 6.0 percent, and said it expected India to post similar growth next year.
It raised its forecast for inflation for end-March to 8.5 percent from 6.5 percent but added prices should start falling from July as a new harvest eases food shortages.
India's economy expanded by 7.9 percent in the second quarter but the growth was driven mainly by government stimulus and record low interest rates.
Central bank governor Duvvuri Subbarao said authorities were keeping interest rates on hold to play safe because "we must remember recovery is yet fully to take hold".
The repo, the rate at which the central bank lends to commercial banks, was kept at 4.75 percent, while the reverse repo, the rate at which it borrows from banks, was held at 3.25 percent.
"We are seeing the beginning of monetary policy tightening," said Vaibhav Agrawal, research vice president at Angel Broking.
"But the rate hike process will be gradual over a period of two years and will be unlikely to stifle demand," he told AFP.
Business leaders praised the central bank's action.
"The RBI has performed a fine balancing act" by supporting recovery by keeping rates on hold and tackling inflation "by sucking out excess liquidity," said Chandrajit Banerjee, director general of the Confederation of Indian Industry.
India's benchmark 30-share Sensex index closed up 0.31 percent or 51.09 points at 16,357.96 as banking and property stocks firmed on the rate news.
Economists say the bank may first raise benchmark interest rates in April once the recovery becomes firmly entrenched.
The bank's announcement comes as social unrest has been rising over skyrocketing food prices.
Annual food inflation is running at 17.4 percent with some staples up by more than 100 percent, causing huge hardship for the poor, the ruling Congress government's key support base.
On Thursday, demonstrators in poverty-hit eastern India burnt tyres and blocked roads to protest against food price rises fuelled by last year's weak monsoon that hurt crop output in the country of nearly 1.2 billion people.
But the central bank has said hiking interest rates is an ineffective weapon to tackle food price inflation driven by crop shortages.
The government is seeking to boost food supplies to bring down prices.
The Reserve Bank of India (RBI) boosted its cash reserve ratio-the sum commercial banks keep on deposit-by a higher-than-expected 75 basis points to 5.75 percent as it looked to counter "inflationary expectations."
India is trying to perform a delicate balancing act of tackling high annual inflation, which is running at 7.31 percent due to soaring food costs, while keeping growth on track in Asia's third-largest economy.
The two-stage increase in the cash reserve ratio -- 25 basis points higher than analysts' forecasts-will suck 360 billion rupees (7.7 billion dollars) from the banking system.
The rise was seen as a move toward monetary tightening after a period of aggressive easing to shield India from the global slump.
The RBI also hiked its growth forecast for the fiscal year to March to 7.5 percent from a previous target of 6.0 percent, and said it expected India to post similar growth next year.
It raised its forecast for inflation for end-March to 8.5 percent from 6.5 percent but added prices should start falling from July as a new harvest eases food shortages.
India's economy expanded by 7.9 percent in the second quarter but the growth was driven mainly by government stimulus and record low interest rates.
Central bank governor Duvvuri Subbarao said authorities were keeping interest rates on hold to play safe because "we must remember recovery is yet fully to take hold".
The repo, the rate at which the central bank lends to commercial banks, was kept at 4.75 percent, while the reverse repo, the rate at which it borrows from banks, was held at 3.25 percent.
"We are seeing the beginning of monetary policy tightening," said Vaibhav Agrawal, research vice president at Angel Broking.
"But the rate hike process will be gradual over a period of two years and will be unlikely to stifle demand," he told AFP.
Business leaders praised the central bank's action.
"The RBI has performed a fine balancing act" by supporting recovery by keeping rates on hold and tackling inflation "by sucking out excess liquidity," said Chandrajit Banerjee, director general of the Confederation of Indian Industry.
India's benchmark 30-share Sensex index closed up 0.31 percent or 51.09 points at 16,357.96 as banking and property stocks firmed on the rate news.
Economists say the bank may first raise benchmark interest rates in April once the recovery becomes firmly entrenched.
The bank's announcement comes as social unrest has been rising over skyrocketing food prices.
Annual food inflation is running at 17.4 percent with some staples up by more than 100 percent, causing huge hardship for the poor, the ruling Congress government's key support base.
On Thursday, demonstrators in poverty-hit eastern India burnt tyres and blocked roads to protest against food price rises fuelled by last year's weak monsoon that hurt crop output in the country of nearly 1.2 billion people.
But the central bank has said hiking interest rates is an ineffective weapon to tackle food price inflation driven by crop shortages.
The government is seeking to boost food supplies to bring down prices.