India Raises Rates, Breaks Ranks With BRICs

India’s central bank raised interest rates for the 12th time since the start of March 2010, breaking ranks among the so-called BRIC nations that have either cut or held borrowing costs as the global recovery falters.

The Reserve Bank of India increased the repurchase rate to 8.25 percent from 8 percent, it said in a statement today. Fourteen of 17 economists in a Bloomberg News survey predicted the decision and three expected no change.

Governor Duvvuri Subbarao’s move contrasts with Brazil and Russia, which cut borrowing costs in the past month, while China has paused rate increases since early July. Higher food and fuel prices and weakness in the rupee may keep inflation above 9 percent, a level exceeded in each of the last nine months.

“The decision clearly points out that the RBI’s top priority is curbing inflation despite concerns about global turmoil,” said Indranil Sen Gupta, Mumbai-based emerging Asia economist at Bank of America Corp. “There will be pressure on inflation after last evening’s petrol-price increases and the rupee’s depreciation.”

The yield on the 7.8 percent bond due April 2021 rose 1 basis point, or 0.01 percentage point, to 8.34 percent at 12:44 p.m. in Mumbai. The Bombay Stock Exchange Sensitive Index gained 1 percent. The rupee advanced 0.1 percent to 47.50 per dollar.
Weaker Rupee

The Indian rupee has declined 5.9 percent this quarter, the worst fall in Asia, as investors shunned emerging markets on concern the world economy is weakening.

Inflation in India is the highest among the BRICS nations, quickening to a 13-month high of 9.78 percent in August.

Consumer prices rose 7.2 percent in Brazil, 8.2 percent in Russia and 6.2 percent in China last month from a year earlier. In South Africa, they climbed 5.3 percent in July.

“Inflation remains high, generalised and much above the comfort zone of the Reserve Bank,” the central bank said in the statement. “A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is therefore imperative to persist with the current anti-inflationary stance.”

Subbarao has raised borrowing costs by a total of 350 basis points since mid-March 2010, the fastest round of increases since the Reserve Bank was established in 1935, Bloomberg data show.

India needs to control inflation to protect purchasing power and sustain growth, the Reserve Bank has said.
Slowing Growth

The $1.7 trillion economy expanded 7.7 percent in the three months ended June 30 from a year earlier, the slowest pace since the last quarter of 2009. Gross domestic product rose 7.8 percent in the previous three months.

“Growth in India is moderating and not collapsing,” Leif Eskesen, a Singapore-based economist at HSBC Holdings Plc, said before the report. “The global softness is clearly a concern, but India’s more domestically-oriented economy is less vulnerable than other Asian economies.”

India’s central bank said that even as many indicators point to moderating growth, “in the current scenario, with the likelihood of inflation remaining high for the next few months, rising inflationary expectations remains a key risk.”

Inflation may accelerate after Indian Oil Corp., the country’s biggest refiner, raised gasoline prices from today for the second time in four months. Losses from selling fuels below cost are increasing following the rupee’s decline against the dollar, Indian Oil Finance Director P.K. Goyal said yesterday.
‘Direct Impact’

The increase in gasoline prices will have a “direct impact of 7 basis points” on inflation, in addition to an “indirect impact with a lag,” according to today’s statement.

Oil in New York has dropped 6.3 percent this quarter. It rose 0.1 percent to $89.45 a barrel at 12:40 p.m. in Mumbai.

“Even though crude prices have softened, the rupee’s fall is making imports more expensive,” said Roy Paul, Mumbai-based deputy general manager of treasury at Federal Bank Ltd. “That will keep the pressure on inflation.”

Officials from China to South Korea have refrained from raising rates in recent weeks to gauge whether slowing economic growth will dissipate price pressures. In Brazil, the central bank opted to cut its target Selic rate on Aug. 31 for the first time since 2009 to protect expansion.

Policy makers in Russia, which doesn’t target one rate, reduced the rate charged on repurchase loans and raised the deposit rate on Sept. 14 to bolster the amount of cash on the market and spur growth.

Prime Minister Manmohan Singh last month said curbing inflation is his government’s priority. The opposition has criticised him for failing to control price gains in a country where the World Bank estimates more than three-quarters of the population live on less than $2 a day.

“As monetary policy operates with a lag, the cumulative impact of policy actions should now be incresingly felt in further moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12,” the central bank statement showed.