India Raises Interest Rates for First Time Since 2008 (Update3) - BusinessWeek

March 19 (Bloomberg) -- India’s central bank unexpectedly raised interest rates for the first time in almost two years, saying controlling price-gains has become “imperative’ after inflation accelerated to a 16-month high.

Reserve Bank of India Governor Duvvuri Subbarao increased the benchmark reverse repurchase rate to 3.5 percent from a record-low 3.25 percent and the repurchase rate to 5 percent from 4.75 percent, according to a statement in Mumbai. Stocks in the U.S. and Europe declined after the decision, a month before the bank’s scheduled monetary policy meeting.

India is the latest central bank to raise its key interest rate as the global economy’s recovery from the worst recession since World War II gathers pace. Lagging behind are policymakers in the Group of Seven economies, with the Federal Reserve and European Central Bank among those waiting for evidence of a more concrete recovery before they unwind record low borrowing costs.

“This is just the start of the normalization process, we have some way to go,” said Prasanna Ananthasubramaniam, chief economist at ICICI Securities Primary Dealership Ltd. in Mumbai.

Prime Minister Manmohan Singh’s top economic advisers Montek Singh Ahluwalia and Chakravarthy Rangarajan this week described India’s inflation rate as “worrying” and “unacceptable” while HSBC Holdings Plc and Nomura Holdings Inc. said the bank was “behind the curve” in raising rates.

Contain Risk

Australia and Malaysia both increased rates this month, while Norway and Israel did so at the end of last year. The World Bank indicated this week that China should act to help contain the risk of a property bubble. Canada may be the first G-7 central bank to shift after data today showed its core inflation rate unexpectedly accelerated last month.

Subbarao, who is scheduled to announce policy on April 20, moved today after India’s industrial production gained 16.7 percent in January following a 17.6 percent increase in December from a year earlier, the fastest pace since at least 1994, according to Bloomberg data.

The benchmark wholesale-price inflation rate touched 9.89 percent in February, according to the commerce ministry.

“Recovery is increasingly taking hold,” the central bank said in its statement. “The developments on the inflation front, however, are a source of concern.”

Stocks Decline

The S&P 500 fell 0.7 percent at 11:33 a.m. in New York today, trimming its third straight weekly advance to 0.7 percent. The Dow dropped 0.6 percent to 10,720.07. The Stoxx Europe 600 Index slipped 0.3 percent to 260.55 in London after earlier rising as much as 0.6 percent.

India’s 10-year bonds completed their best week since September while stocks posted their biggest weekly gain in nine months after Standard & Poor’s yesterday upgraded the nation’s debt-rating outlook to stable from negative on optimism of economic growth and the government’s ability to cut debt.

“It’s the right step for combating inflation -- the long- term health of the market will improve as it will improve the health of the economy,” said Kishor Ostwal, managing director of CNI Research (India) Ltd. in Mumbai. “However, on Monday the market will open down by at least 200 to 300 points. There will be a knee-jerk reaction from market players as it will suck a certain amount of liquidity from the market.”

The yield on India’s benchmark 10-year government bonds declined 18 basis points this week to 7.83 percent in Mumbai. The Sensitive stock index rose 2.4 percent to 17,578.23 during the period.

Economic Growth

India’s $1.2 trillion economy, Asia’s biggest after Japan and China, may expand 8.2 percent in the next fiscal year, compared with 7.2 percent in the year to March 31, the Finance Ministry said in February.

Inflation has returned to Asia as growth accelerates amid the global economic recovery. Consumer prices in China rose to a 16-month high of 2.7 percent in February from a year earlier as industrial production grew 20.7 percent in the first two months of 2010, the most in more than five years. Factory output in Malaysia rose 12.7 percent in January.

Inflation is politically sensitive in a country like India where the World Bank estimates three-quarters of the nation’s 1.2 billion people live on less than $2 a day. Opposition parties led by the Bharatiya Janata Party repeatedly stalled proceedings in parliament this month, accusing Singh’s government of being anti-poor and failing to curb prices.

Malaysia increased its overnight policy rate this month, saying it wants to avoid “financial imbalances.” China ordered banks to set aside more deposits as cash last month for a second time while India raised its cash reserve ratio to 5.75 percent from 5 percent in January. Today’s rate increase by the Reserve Bank is the first since July 2008.

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Cuando al fin encontramos las respuestas, cambiaron las preguntas.

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