(MUMBAI, IND) - India's central bank hiked interest rates by a higher-than-expected 50 basis points on Tuesday, its 11th increase since March last year as it struggles to combat near double-digit inflation.
After a meeting in the financial capital Mumbai, the governor of the Reserve Bank of India Duvvuri Subbarao argued a hike was required because of rising inflation fuelled by higher fuel prices and manufacturing costs.
"Although the impact of past monetary policy actions is still getting transmitted, considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance," he said.
India has the highest inflation of any major world economy except for Russia, with the latest reading for June putting it at 9.44 percent over 12 months from 9.06 percent the previous month.
The central bank has expressed concern that inflation has spread from the food sector into the rest of the economy, leading to rising wages and a danger of a damaging price spiral.
"If RBI wants to be seen as an inflation fighter, it cannot stop hiking interest rates." said Ritika Mankar, economist with research firm Ambit Capital in Mumbai.
After the hikes on Tuesday, the RBI's repo rate at which it lends to commercial banks stands at 8.0 percent and the reverse repo -- the rate it pays to banks for deposits -- is at 7.0 percent.
The repo rate is now at a near three-year high and the reverse repo is at its highest level in more than a decade, analysts say.
Indian shares tumbled after the decision, with the benchmark 30-share index on the Bombay Stock Exchange down nearly two percent intraday, reflecting concerns that economic growth will slow.
Business leaders have called for a halt to the rises, amid fears that the rising cost of credit -- and a lack of economic reforms -- could hit further spending by consumers and investment.
Subbarao said the RBI now expected inflation to be around 7.0 percent at the end of the fiscal year in March from 6.0 percent earlier.
He warned that "inflation could remain elevated for a few months before moderating towards the late part of this year".
Most economists, who had predicted a quarter point rise, were surprised by the sharper hike in rates and warned that India's economic growth this fiscal year could slow further, possibly to below 8.0 percent.
"The hike was much sharper than expected," added Siddhartha Sanyal, chief India economist with Barclays Capital. "An 8.0 percent growth now looks difficult to achieve," he told AFP.
Reducing prices has become a political priority for the Congress-led coalition in New Delhi, even as higher growth is seen as key to reducing crushing poverty in the nation of 1.2 billion.
The RBI had signalled its intent to raise rates late Monday, outlining in its macroeconomic and monetary review that it would maintain its anti-inflationary position.
The bank has been on its longest streak of monetary tightening in a decade and is on record as saying that short-term economic growth may have to be sacrificed to fight inflation running at "uncomfortable" levels.
The government has revised down its growth forecast from 9.0 percent to 8.6 percent for the current fiscal year due to what it called a "perceptible slowdown" in the past two financial quarters.
Analysts believe at least one more rate increase is on the cards before the end of the calendar year. Ambit Capital's Mankar refused to rule out another 50 basis points hike by the end of the financial year in March.
India's annual industrial output growth decelerated in May to 5.6 percent, its weakest pace in nine months, down from 8.5 percent expansion in the same month a year earlier.
The surge in inflation was initially triggered by spiralling food prices and then exacerbated by rising global commodity prices and higher fuel costs.
Subbarao said crude prices remained volatile and higher fuel costs would keep upward pressure on inflation.
"The monetary policy stance will depend on the evolving inflation trajectory which will be determined by trends in domestic growth and global commodity prices," he added.
The next RBI meeting is on September 16.
