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India central bank raises key interest rate

India central bank raises key interest rate

July 26th, 2011 by KATY DAIGLE, Associated Press in News

NEW DELHI (AP) - India's central bank raised its key interest rate by half a percentage point Tuesday, its 11th hike in less than a year and a half, as it warned that inflation remains the country's main economic concern.

The bank raised the short-term lending rate - or repo rate - from 7.5 percent to 8 percent, a bigger increase than expected after inflation rose to 9.4 percent in June from 9.1 percent in May.

"Inflation continues to be the dominant macroeconomic concern," said Reserve Bank of India Governor Duvvuri Subbarao.

Annual inflation could hit 7 percent this year, the bank said, raising its earlier projection of 6 percent. However, it maintained its annual growth projection at 8 percent for the fiscal year through March 2012.

The half-point rake hike was seen as a sign that the central bank is willing to sacrifice short-term growth to control inflation, which despite the bank's actions is still worse in India than in any other major Asian economy.

High oil prices, loose fiscal policy and supply constraints have muted the impact of the RBI's long fight against inflation.

The bank on Tuesday appeared to chastise the government for fueling inflation, saying in its quarterly review of monetary policy that "the economy's ability to grow rapidly for any length of time without provoking inflation is dependent on implementing policies, with corresponding resource allocations, which will allow the supply of various products and services to keep pace with demand."

With the short-term borrowing rate fixed at 1 percentage point below the repo rate, it was raised to 7 percent in line with the bank's latest decision.

The rate hike announcement dismayed business groups and investors, who sent the benchmark Sensex stock index tumbling more than 300 points.