Business

India hikes interest rate in a bid to rein in inflation

A vendor selling vegetables in India
Image caption Food prices have been rising across Asia, threatening to derail growth in major economies

India's central bank has raised interest rates as it continues to fight rising prices in the country.

The Reserve Bank of India raised the cost of borrowing from 7.25% to 7.5%, the 10th rise since March 2010.

Wholesale prices in India rose by a faster-than-expected 9.06% in May, as rising food and fuel costs kept up the pressure on inflation.

Rising prices have become a hot political issue in India, Asia's third-largest economy.

"Inflationary pressures, primarily from commodity prices, have increased," the bank said in a statement.

"Going forward, notwithstanding both signs of moderation in commodity prices and some deceleration in growth, domestic inflation risks remain high," the central bank added.

Growth concerns

While India's economy emerged strongly from the global financial crisis, rising cost of food and other essential commodities have become a big concern.

Prime Minister Manmohan Singh has called inflation a "serious threat" to the country's growth.

As a result, the central bank has been raising the cost of borrowing in the country in an attempt to slow down demand and keep prices under control.

Analysts say that as it becomes more expensive to borrow money, growth is likely to be hit.

"The tightening will reduce GDP growth to 7.4% this year," said Dariusz Kowalczyk of Credit Agricole CIB.

However, the bank said that fighting rising prices was its top priority and it recognised that growth could be hit in the short term.

"In the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control," it said.

Related Internet links

The BBC is not responsible for the content of external Internet sites