India Holds Interest Rates Steady, Sees Inflation
Posted by Gregg Killoren on July 28, 2009
The Reserve Bank of India (RBI), the country’s central bank, has announced that it is holding its key lending rate, the repo rate, at 4.75 percent. The rate has been held at that level since October 2008, following a series of rate cuts that has brought the repo rate to its lowest level in 9 years. As the credit crisis swept around the world last fall, India, like many other countries, cut its key lending rate in order to combat the growing threat of deflation.
In fact, after a bout of inflation, which saw India’s Wholesale Price Index rise to a 16-year high in August 2008 of 13 percent, India’s economy fell into disinflation. This month, the Wholesale Price Index was measured at -1.25 percent. The rapid decline in commodity prices from the highs of last summer had much to do with the dramatic change from rapid inflation to near deflation.
Now, however, the RBI forecasts that inflation would pick up in the second half of this fiscal year to reach 5 per cent by the end of March 2010.
In a statement, Duvvuri Subbarao, the central bank governor, said a rebound of commodity prices ahead of a global recovery would help the economy emerge from a deflationary spell by October.
“Pressures from global commodity prices, which had been abating markedly since August 2008 on account of the slump in global demand seem to have bottomed out in early 2009,” he said in the the policy review.
The RBI said it wanted to contain perceptions of inflation in the range of 4 to 4.5 per cent in the months ahead.
The Reserve Bank also issued a conservative growth forecast for the Indian economy, warning about continued uncertainty about the global outlook. It predicted GDP growth of 6 percent, lower than last year’s growth of 6.7 percent and below a government forecast of about 7 percent for 2009/10. Economic analysts at RGE Monitor have forecast that India’s GDP in 2009 may fall to as low as 5 percent (click here for previous post).
“Notwithstanding the temporary hiccups of the crisis period, India is not a demand constrained economy; it is a supply constrained economy. The critical requirement for accelerated growth is to raise the level of investment, particularly in infrastructure,” Mr Subbarao said.
