MUMBAI — India’s central bank announced on Tuesday a number of changes to its interest rate policies, continuing efforts to contain inflation while rolling back currency stabilization measures put in place in July to prop up the weakening Indian rupee. The bank also warned that inflationary pressures were unlikely to abate in the near future.
In its quarterly monetary policy review, the central bank, the Reserve Bank of India, raised its repurchase rate, the short-term lending rate banks rely on for their underlying financing, to 7.75 percent from 7.5 percent. Indian commercial banks are allowed to borrow a portion of their money at the rate, also known as the repo rate. The move is seen by many in the Indian financial markets as a continuation of the anti-inflationary measures taken in September, when the bank raised the rateby a quarter of a percentage point, from 7.25 percent.
With the rupee now stable, the central bank lowered the rate on the marginal standing facility, which is essentially the cost of borrowing for lenders, by a quarter of a percentage point, to 8.75 percent. The interest on the marginal standing facility is the cost for banks to make additional loans and therefore has a greater effect on the banks’ lending rates to customers. The drop in the marginal standing facility’s rate is expected to infuse liquidity into the banking system and make more credit available to the beleaguered industrial sector.
The repo rate increase, which was in line with market expectations, was seen as an attempt to combat the severe price pressures that plague Asia’s third-largest economy, after China and Japan. In September, the wholesale price index, India’s benchmark for inflation, hit a seven-month high at 6.46 percent, while the consumer price index rose 9.84 percent from the same month last year.
“The interest rate hike was largely expected in view of the elevated consumer price index that has remained close to double digits in the last few months,” said Anis Chakravarty, senior director at Deloitte India. “The announcement shows positive aggressive positioning by the Reserve Bank toward anchoring inflation while ensuring adequate liquidity.”
The rise in the inflation rate is expected to continue. “Overall wholesale price index inflation is expected to remain higher than current levels through most of the remaining part of the year, warranting an appropriate policy response,” said Raghuram Rajan, who took office as the central bank’s governor in early September.
Shares on the Bombay Stock Exchange were up 1.74 percent on Tuesday afternoon after the announcement, and the rupee was trading strong at 61.37 per dollar.
“The markets will now be more interested in seeing if inflation comes down in coming months due to cooling down of food prices,” said Dinesh Thakkar, chairman and managing director of Angel Broking in Mumbai. “This would pave the way for a more sustained declining trend in interest rates and eventual revival in investment and growth rates.”
The central bank lowered its economic growth forecast for the current fiscal year, which runs through next March, to 5 percent from an earlier projection of 5.5 percent, citing domestic constraints and vulnerability to external economic factors. The World Bank and the International Monetary Fund lowered their growth projections for India earlier this month.
Many in the Indian financial markets feared that the increase in the repo rate would be an additional deterrent to growth. “Industry is already reeling under pressures of high cost of capital and low availability in a tight liquidity situation,” said Chandrajit Banerjee, the director general of the Confederation of Indian Industry. “Raising the interest rate will hurt growth while proving unequal to the task of tackling inflation.”
However, some analysts said further interest rate increases were possible in the coming months because of lingering inflationary pressures and elevated inflation expectations. “With inflation risks still tilted to the upside, the R.B.I. has to keep its inflation guards up and stand ready, if needed, to raise rates further to bring inflation under control,” said Leif Lybecker Eskesen, chief economist for India and Asean at HSBC Global Research. “Bringing about a sustained recovery in growth and inflation down, however, also hinges importantly on the government moving from the announcement to the implementation of structural reforms.”