While investors studied China for signs it is taking action against the risks of a runaway recovery, Indian policy makers surprised the market by pushing up interest rates by 25 basis points.
In response, global commodity prices plummeted and the US dollar soared as risk appetite dissipated.
The decision by the Reserve Bank of India earlier this month to up the benchmark reverse repurchase rate to 3.5% from a record-low 3.25% was the first increase since July 2008. The bank said containing inflation is now ‘imperative’.
This came a month before a scheduled meeting of its monetary policy committee, which analysts now think the bank could use to raise rates again.
Australia and Malaysia have already increased interest rates this month, while Norway and Israel did so at the end of last year as the global economy’s recovery from the worst recession since World War II gathered momentum.
The pressures in India were clear. The headline inflation rate accelerated to 9.89% in February – the highest level in 13 months and this compares to 3.5% in February 2009. Food prices are 18% up on last year and manufacturing inflation hit 7.42%, against 6.55%. Most observers now expect double-digit inflation for the current month.
A National Council of Applied Economic Research survey found 97.4% of Indian companies were ‘operating at or above an optimal level of capacity’ in January this year, close to an all-time high of 98.6% in January 2007. Some are also reporting labour shortages and major IT companies have been granting wage rises of up to 12%.
It is clear the Indian government needs to deal with this looming crisis if it is to pursue further economic liberalisation. Deepak Lal, director of stockbroker Astaire, wrote in a recent note: ‘Rising prices have sparked street protests, backed by opposition parties. This has restrained the Indian government from pushing through reforms like relaxing fuel and farm price controls, despite the ruling Congress party not facing any risk of losing power nationally.’
Source: http://bit.ly/niftydirectblogz
