India raises interest rates again

The government has raised its main interest rates for a fourth time this year to try to tame double-digit inflation.

India raised its main interest rates today for a fourth time this year in a fresh bid to tame double-digit inflation that is souring the experience of economic growth for millions of poor citizens. The move was the second increase this month and designed to tackle surging consumer prices that are being driven by high food costs, rising wages and an expanding economy that is forecast to grow 8.5 per cent this financial year.

India's inflation rate is now the highest among the Group of 20 economic powers. The governor of th Reserve Bank of India, D. Subbarao, said: "The domestic economic recovery is firmly in place, strengthening, and steadily reverting to a pre-crisis growth trajectory." But "inflationary expectations are elevated and persistent". The bank opted for a 25-basis-point increase in its repo rate, the rate at which it lends to commercial banks, and a 50-basis-point rise for the reverse repo, the rate the RBI pays to banks for deposits.

The rates now stand at 5.75 percent and 4.50 percent respectively. Vaibhav Agrawal, an economist at Angel Broking, said: "We expect more rate hikes in coming months." He said the rise had been widely forecast by analysts. "We don't expect the rate hikes to impact growth as we are still well below peak interest rate levels." As the rate rise was announced, India's parliament speaker was forced to adjourn the day's session by opposition members raucously protesting against inflation.

Opposition members rose to their feet and shouted: "We have to change this incompetent government." The Congress-led government has been under relentless attack from opposition parties for its inability to protect the poorest from surging food prices. India's annual wholesale price index, the main cost-of-living measure, stood at 10.55 per cent in June, almost double the central bank's preferred 5.5 per cent level, putting pressure on Mr Subbarao to act.

Rising prices are one of the biggest political issues in the country and a daily subject of conversation for millions, with even the Bollywood film industry taking up the issue in a recent production. A song titled 'Mehangayi Daayan' ('The Inflation Witch') in a recent film produced by acting superstar Aamir Khan goes: "My husband's earnings are good but his second wife - inflation - is eating them up."

The cost of food has been rising since last year when the worst drought in 37 years hit farm output. Food inflation is now spilling into the general economy as activity accelerates. The bank raised its inflation projection for this fiscal year to March 2011 to 6 per cent from 5.5 per cent, and increased its growth projection to 8.5 per cent from 8 per cent previously. Over the past seven months, annual food inflation has swung between 13 and 20 per cent, causing huge hardship, especially among the 450 million people who struggle below the poverty line.