India's central bank hails drop in inflation
Thursday, 2 August 2007
Jo Johnson, FT Syndication Service
NEW DELHI: India's central bank hailed Tuesday a "heartening" fall in inflation, but once again raised reserve requirements for banks, warning that strong domestic demand, coupled with soaring oil and food bills, was causing "upward pressures" on prices.
The Reserve Bank of India left its key lending rate unchanged at 7.75 per cent as expected, but raised the cash reserve ratio, the proportion of cash banks must keep on low-yielding deposit with the central bank, to a near six-year high.
The bank confirmed its forecast for growth of 8.5 per cent in the year to March 31 2007.
The Indian economy grew by 9.4 per cent last year, its fastest expansion since 1988-89 and one bettered only by China among the 20 largest economies.
Over the four-year period starting in 2003-04 when the current expansionary phase began, real gross domestic product growth has averaged 8.6 per cent, up from 5.1 per cent in the preceding four years and also above the average of 5.7 per cent achieved in the 1990s.
P. Chidambaram, finance minister, blamed by some economists for having prevented the RBI from raising rates fast enough to prevent the recent inflationary rise, has been calling for India to make an "extra effort" to achieve double digit growth.
The Indian central bank echoed Tuesday mounting concern in Beijing over the Chinese growth model, saying China's current phase of growth was "perceived as unstable and environmentally unsustainable".
In its latest move to stem overheating in Asia's second-fastest growing economy, the RBI said the cash reserve ratio would rise to 7.0 per cent from 6.5 per cent with effect from August 4, taking it to its highest level since November 2001.
India's move, which prompted sharp falls in the shares of banks and carmakers such as Tata Motors and Maruti came a day after China raised the level of deposits that lenders must hold in reserve for the ninth time in 13 months.
Inflation, measured by variations in the wholesale price index on a year-on-year basis, fell from 5.9 per cent at end-March 2007 to 4.4 per cent as on July 14, 2007, within the bank's comfort range.
The RBI announced in April that it would aim to contain inflation at close to 5.0 per cent in 2007-08.
The slowdown in non-food bank lending to 24.4 per cent from a recent high of 32.8 per cent and the sharp rise in the strength of the currency in the past three months were also likely to have counted against any rate rise, economists said.
NEW DELHI: India's central bank hailed Tuesday a "heartening" fall in inflation, but once again raised reserve requirements for banks, warning that strong domestic demand, coupled with soaring oil and food bills, was causing "upward pressures" on prices.
The Reserve Bank of India left its key lending rate unchanged at 7.75 per cent as expected, but raised the cash reserve ratio, the proportion of cash banks must keep on low-yielding deposit with the central bank, to a near six-year high.
The bank confirmed its forecast for growth of 8.5 per cent in the year to March 31 2007.
The Indian economy grew by 9.4 per cent last year, its fastest expansion since 1988-89 and one bettered only by China among the 20 largest economies.
Over the four-year period starting in 2003-04 when the current expansionary phase began, real gross domestic product growth has averaged 8.6 per cent, up from 5.1 per cent in the preceding four years and also above the average of 5.7 per cent achieved in the 1990s.
P. Chidambaram, finance minister, blamed by some economists for having prevented the RBI from raising rates fast enough to prevent the recent inflationary rise, has been calling for India to make an "extra effort" to achieve double digit growth.
The Indian central bank echoed Tuesday mounting concern in Beijing over the Chinese growth model, saying China's current phase of growth was "perceived as unstable and environmentally unsustainable".
In its latest move to stem overheating in Asia's second-fastest growing economy, the RBI said the cash reserve ratio would rise to 7.0 per cent from 6.5 per cent with effect from August 4, taking it to its highest level since November 2001.
India's move, which prompted sharp falls in the shares of banks and carmakers such as Tata Motors and Maruti came a day after China raised the level of deposits that lenders must hold in reserve for the ninth time in 13 months.
Inflation, measured by variations in the wholesale price index on a year-on-year basis, fell from 5.9 per cent at end-March 2007 to 4.4 per cent as on July 14, 2007, within the bank's comfort range.
The RBI announced in April that it would aim to contain inflation at close to 5.0 per cent in 2007-08.
The slowdown in non-food bank lending to 24.4 per cent from a recent high of 32.8 per cent and the sharp rise in the strength of the currency in the past three months were also likely to have counted against any rate rise, economists said.