India raises interest rates rise to stem inflation

India's manufacturing sector has suffered because of higher interest rates as Puneet Pal Singh reports.

Related Stories

India's central bank has unexpectedly raised interest rates in an attempt to rein in stubbornly high consumer prices in a crucial election year.

The Reserve Bank of India (RBI) raised the benchmark repo rate - the amount at which it charges to lend to commercial banks - to 8% from 7.75%.

Economists had expected no change after its meeting in Mumbai on Tuesday.

The RBI said that another near-term hike was unlikely if inflation eased to a more comfortable level.

India's main gauge of inflation, the wholesale price index (WPI), rose 6.16% in December, from a year earlier. While that was a slight fall on from the previous month, the rate continues to remain an issue with the central bank.

'Weakens growth'

Meanwhile, the country's consumer prices index (CPI) - which is seen as the key gauge of inflation across most other countries - rose at an annual rate of 9.87% in December.

"Inflation excluding food and fuel has also been high, especially in respect of services, indicative of wage pressures and other second-round effects," the central bank said in a statement.

"Elevated levels of inflation erode household budgets and constrict the purchasing power of consumers. This, in turn, discourages investment and weakens growth."

Analysis

The Indian central bank governor - Raghuram Rajan has done it again. Just when everyone was expecting the central bank (the RBI) to hold interest rates, they have hiked them again, taking the markets by surprise.

But the decision clearly underlines the RBI's top priority - fighting the stubbornly high inflation which has been a big bottleneck for the economy over the last two years.

High food and fuel prices have affected most people and were one of the main reasons for the huge electoral defeat of the ruling Indian coalition government in the recent state elections. And inflation remains a key political issue even in the upcoming general elections - which are due in April - May this year.

Even though food prices have cooled down in the past month, the central bank does not want to take any chances. And by increasing interest rates at this juncture, it wants to steer the economy on the path of low inflation even if it comes at the cost of slow economic growth in the short term.

The RBI last week had proposed setting a target of 4% consumer inflation by 2016.

It said that the increase in the policy rate "will set the economy securely on the recommended disinflationary path".

RBI chief Raghuram Rajan had left rates unchanged at the bank's last policy meeting in December, after raising the benchmark rate in September and October.

India's main share index fell following the announcement, with lenders such as ICICI Bank leading the decline.

Price problem

India has been struggling to control what is Asia's highest inflation level, which was running at about 10% last year.

Rising prices have impeded economic growth in the country, which has also been under pressure from a weakened currency.

The Indian rupee has lost about 14% of its value over the past 12 months, which has made the cost of imported products more expensive.

Higher inflation causes consumers to spend less, and its impact is felt most by India's poor. According to the World Bank, nearly two-thirds of India's population live on less than $2 a day.

The central bank said in its statement that "inflation is also a tax that is grossly inequitable, falling hardest on the very poor".

Companies higher input costs have prompted some to raise prices.

Authorities have been trying to bring down prices, as inflation is also a politically sensitive issue in India.

The country is due to hold general elections in May.

More on This Story

Related Stories

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

More Business stories

RSS

BBC Business Live

  1.  
    RUSSIA GAS 06:49: BBC Radio 4

    Europe could cope if Russia were to interrupt gas supplies in retaliation to European sanctions, says Malcolm Bracken of stockbrokers Redmayne Bentley. Norway can increase oil and gas production and gas reserves are in a pretty healthy shape, he says. Vladimir Putin needs money from the West more than he's letting on so we shouldn't be too worried about the effect of sanctions, says Mr Bracken on Today.

     
  2.  
    BUSINESS RATES 06:43:

    More than 100 of the UK's biggest companies, including Tesco and Marks & Spencer, have called for an overhaul of business rates. In an open letter to the Daily Telegraph they say business rates "are no longer fit for purpose for the 21st century". The tax brings in £25bn for the Treasury annually.

     
  3.  
    OIL PRICES 06:35: BBC Radio 4

    Brent Crude fell below $97 a barrel on Monday for the first time in two and a half years. Malcolm Bracken of stockbrokers Redmayne Bentley explained the fall on the Today programme. "There's been a slowdown in China, cars are becoming more efficient, the war premium is falling, sanctions haven't really had an effect on oil production in Russia and money is tightening," he says.

     
  4.  
    ALIBABA SHARE SALE 06:20: Radio 5 live
    Alibaba head office, Hangzhou

    Alibaba has raised the price range of shares in its US stock market debut and could now raise $25bn (£15.4bn). The funds will allow the Chinese internet company "to make its mark" in the US market place says BBC Business presenter Rico Hizon on Wake Up to Money. Company executives are on an international road show to market the shares. Today there are in Singapore, tomorrow London.

     
  5.  
    SCOTTISH INDEPENDENCE 06:12: Radio 5 live
    Scottish flag

    The leaders of the three main parties at Westminster have signed a pledge to devolve more powers to Scotland, if Scots reject independence. On Wake Up to Money Colletta Smith, the Economics Correspondent for BBC Scotland says it amounts to an "agreement to make some kind of agreement". Details will have to be worked out after the vote, she says.

     
  6.  
    PHONES 4U COLLAPSE 06:02: Radio 5 live
    Phones 4U

    "I'm not surprised it fell over," says fund manager, George Godber in reference to the failure of Phones 4U over the weekend. On Wake Up to Money Mr Godber says the company did "not have any room for financial manouevre" because its private equity owners had recently loaded it with £250m in debt. Phones 4U founder John Caudwell will be on Radio 5 at around 08:45.

     
  7.  
    06:00: Matthew West Business Reporter

    Morning folks as always you can get in touch with us here at bizlivepage@bbc.co.uk and on twitter @bbcbusiness.

     
  8.  
    05:59: Ben Morris Business Reporter

    Good morning. It's shaping up to be a busy morning with inflation figures due at 09:30 and we'll see what John Caudwell has to say about the demise of the company he founded, Phones 4U. Stay with us.

     

Features

From BBC Capital

Programmes

  • Click reporter Jen Copestake looks at a smart mirrorClick Watch

    From the mirror offering beauty advice to next gen robot vacuums - the connected home of the future

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.