India's central bank raised interest rates on Thursday for the 10th time in just over a year to combat stubbornly high inflation and signalled more increases to come even as growth in Asia's third-largest economy is slowing down. The Reserve Bank of India (RBI) raised the repo rate, at which it lends to banks, by 25 basis points to 7.5 percent, in line with expectations in a Reuters poll. Wholesale inflation stands at 9 percent, roughly double the central bank's comfort level.
Policymakers in the world's big emerging economies that led the world's recovery from the financial crisis face a balancing act as growth slows but inflation stays high. A stalling US recovery and weakness in Europe and Japan add to the challenge of managing inflation without choking growth. Inflation trumps growth concerns for now. India's rate rise followed moves to tighten policy this month by China, Brazil and South Korea. "Domestic inflation risks remain high," the Reserve Bank of India wrote in its mid-quarter review explaining its decision.
The RBI also raised the reverse repo rate, at which it absorbs excess liquidity, by 25 basis points to 6.5 percent. Last month, it said it would keep the rate at 1 percentage point below the repo rate. Data on Thursday showed food and fuel inflation around 9 percent and 12.8 percent, respectively, in the year to June 4. Both are key drivers of broader inflation but are largely beyond the scope of monetary policy.
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