RBI raises repo rate by 25 bps; maintains hawkish talk

MUMBAI (Reuters) - The Reserve Bank of India (RBI) raised interest rates on Friday for the 12th time in 18 months and said it will persist with its anti-inflationary policy stance, even as growth slows in Asia's third-largest economy.

The RBI lifted its policy lending rate, the repo rate, by 25 basis points to 8.25 percent, in line with expectations, as it persisted in a thus far largely futile fight to curb inflation.

The central bank said it was too soon to ease back from its anti-inflationary bias.

"A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance," it said in a statement.

The RBI's hawkishness, which saw it raise rates by an unexpectedly steep 50 basis points in late July, increasingly jars with dovish talk from central bankers worried about the health of the global economy, with both the United States and euro zone weighed down by debt problems.

It also sets India apart from its Asian neighbours, which have recently rolled back rate hike campaigns.

Headline inflation for August rose to 9.78 percent, data on Wednesday showed, its highest level in more than a year.

India's economic growth has cooled and demand crimped following the cumulative impact of earlier rate increases and rising prices.

"RBI is still viewing rising inflationary expectation as a key risk after a series of 12 rate hikes. This, according to me, is a real worry so far as rate outlook is concerned," said Nitesh Ranjan, chief economist at Union Bank in Mumbai.

The benchmark 10-year bond yield rose 4 basis points after the RBI kept up its hawkish tone, while the one-year swap rate surged 11 basis points. Shares too trimmed gains to be up just about 0.4 percent from 1.4 percent before the announcement.

While inflation in India was initially driven by food and fuel prices, both largely beyond the scope of monetary policy, it has spread to the core non-food manufacturing sector and remains far above the central bank's perceived comfort zone of 4 to 4.5 percent.

Most economists in a poll released on Monday expected the central bank to raise rates on Friday and then pause in a tightening cycle that has made RBI Gov. Duvvuri Subbarao one of the most aggressive central bankers anywhere over the past two years.

Industrial output in July was the weakest in nearly two years, while India's June-quarter economic growth of 7.7 percent was the slowest in six quarters.

The rupee, which plunged to a near two-year low against the U.S. dollar on Wednesday, may further weaken on the rate rise, hitting India's import bill.

Source:
http://in.news.yahoo.com/rbi-raises-repo-rate-25-bps-maintains-hawkish-070745435.html