Reserve Bank of India Hikes Rates on Runaway Inflation

By Anjana Pasricha

29 July 2008

India's Central bank has hiked interest rates in a bid to tackle inflation which is at its highest rate in over a decade. But as Anjana Pasricha reports from New Delhi, there are fears the measure will slowdown growth in one of the world's fastest growing economies.

The latest hike of half a percentage point in interest rates announced Tuesday by the Central Bank came as no surprise.

The Central Bank has been steadily raising interest rates in recent months in a bid to discourage people from borrowing money, and cool consumer demand. The Bank's lending rate will now be nine percent.

The government hopes this will help lower inflation, which is running at nearly 12 percent - the highest in 13 years.

The inflation is worrisome for policymakers in a country where, despite high economic growth, 500 million people live on less than $2 a day. These people have been hit hard by the runaway food and fuel prices in the past year.

The government, which faces elections in several big states later this year, and general elections next year, says bringing down prices is a priority.

The deputy Managing Director of India's largest bank, ICICI, Chanda Kochar, says raising interest rates will bring down inflation in the months to come.

"Inflation will, with all these measures, expected to be brought down to seven percent by March 2009. To achieve that if we have to, as an economy, go through some amount of pain, we have to accept it and move forward," he said.

But the steady increase in interest rates in the past year is expected to dampen economic growth. The Indian economy grew at nine percent last year - the second highest in the world after China. But the Central Bank forecasts that growth this year may slow down to eight percent.

Industries say they have to postpone expansion plans as borrowing becomes more expensive. They are also worried that slowing consumer demand will mean lower profits.

Worries about a slowing economy are impacting stock markets. The Bombay stock index, the Sensex, plunged by 557 points - more than four percent after the latest interest hike was announced on Tuesday.