India's RBI Surprises With Rate Hike
MUMBAI (Dow Jones) - India's central bank announced a surprise increase in its key lending rate Tuesday, signaling its resolve to fight rising prices even as the South Asian economy faces its slowest growth in a decade.
The Reserve Bank of India increased the rate at which it lends to banks overnight by 0.25 percentage point to 8.0%. This is the third rate hike in five months and indicates the central bank's continued hawkish stance. The central bank also gave indications that it is hoping that this could be its last rate increase in this round of tightening as some prices are showing signs of cooling.
All 14 economists polled by The Wall Street Journal last week had expected the RBI to leave rates unchanged after inflation -- measured by both wholesale and retail prices -- showed signs of easing last month, helped by lower food prices.
Wholesale inflation, the main gauge of prices in India, slipped to a five-month low in December to 6.16% while retail inflation--measured by the country's two year old consumer-price index--eased from an all-time high of more than 10% in recent months to 9.87%.
The central bank noted Tuesday that if volatile food and fuel prices were stripped out, CPI inflation rates have remained flat while WPI inflation has risen.
"It is critical to address these risks to the inflation outlook resolutely in order to stabilize and anchor inflation expectations, even while recognizing the economy is weak and substantial fiscal tightening is likely in Q4," RBI Governor Raghuram Rajan said in the policy document.
Mr. Rajan also indicated that he agreed with the recommendation of a central bank panel, which last week suggested the RBI start using a CPI inflation target to determine monetary policy.
He said that Tuesday's rate increase would help achieve the panel's recommendation that consumer inflation be brought below 8.0% by January 2015.
The target should be within two percentage points above or below 4%, the panel said.
If the RBI decides to accept the proposal, it would align India with other economies and mean the RBI would have to move away from its current approach of looking at more than one indicator--inflation, growth and exchange rates-when it set its policy rate. That would mean the RBI may be headed toward a tighter monetary policy until inflation is brought down to the indicative band.
The RBI panel said the central bank should move to lower India's consumer inflation to 8% within the next 12 months and to 6% in 24 months, before adopting the target.
India has been struggling with a period of stagflation as its inflation rates have been stuck at uncomfortably high levels even as the economy has been slowing. Inflation is particularly painful in India where hundreds of millions of people have to survive on less than $2 a day.
Still, most executives and politicians would like to see the central bank start worrying more about growth so India can create the jobs and higher incomes it population of more than 1.2 billion wants.
India's gross domestic product expansion slowed to 4.8% in the quarter ended September, down sharply from 9.9% during one quarter 21/2 years earlier. Its full year growth in the fiscal year ending March is likely to slide to an 11-year low of less than 5% economists say.