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New Delhi: India's central bank signalled it will keep raising borrowing costs after unexpectedly lifting interest rates for the second time in two weeks and telling lenders to keep more cash in reserve. Bonds and stocks tumbled.
The Reserve Bank of India (RBI) increased the repurchase rate by 0.5 percentage point late on Tuesday to 8.5 per cent, the biggest move since 2000, and adjusted the cash-reserve ratio by a similar margin to 8.75 per cent. A "heightened vigil" was needed to anchor inflation expectations, the central bank said in a statement.
Governor Yaga Venugopal Reddy has been caught wrong-footed in setting policy by the surge in crude oil prices that pushed inflation to a 13-year high. Higher rates are needed to convince investors that officials won't let inflation erode returns on stocks and the currency, which have suffered their worst start to the year in at least a quarter-century.
"The RBI is trying to catch up with the curve fin-ally," said Edwin Gutierrez, who manages $5.5 billion in emerging-market debt in London at Aberdeen Asset Management. "The move underscores the fact that they blew their opportunity to do this earlier."
Tuesday's decision came a month before the next monetary policy meeting, scheduled for July 29, as the impact of the first increase in gasoline prices in more than a year pushed inflation to double Reddy's target. Higher fuel prices accounted for most of the 11.05 per cent wholesale rate of inflation during the first week of June.
The RBI may raise rates by another 25 basis points in the July 29 policy meeting, economists at JPMorgan Chase & Co. said, while analysts at Citigroup Inc. expect borrowing costs to be increased by as much as 50 basis points (BPS) without giving a time frame.
"If inflation indicators don't start to come down in the next two or three months, the RBI has more tricks up its sleeve," said Jyoti Narasimhan, research director for India at Global Insight Inc. in Lexington, Massachusetts. "This is more of a first step than a last step."
The government needs a stronger rupee to lower import costs and aid in curbing prices. The rupee has fallen 8.2 per cent this year, making India the only one of the so-called BRIC nations including Brazil, China and Russia that has a weaker currency.
"The policy stance adopted by the RBI should boost the confidence of investors, both domestic and foreign, and augur well for economic growth," the finance ministry said on Wednesday.
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