Interest Rate Rises to 8.5 Percent

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June 25 – The Reserve bank of India raised interest rates for the second time this month and asked lenders to set aside more money as reserves to cool inflation running at a 13- year high.

The repurchase rate was lifted to 8.5 percent from 8 percent, and the cash reserve ratio to 8.75 percent from 8.25 percent, India's central bank said. The increase was the biggest since 2000 and followed a quarter-point rise on June 11.

Governor Yaga Venugopal Reddy is under pressure from the finance ministry to tighten monetary policy after record oil prices drove inflation to 11.05 percent in the week ended June 7. That may further hurt consumer demand and threatens to derail India's record 8.8 percent annual economic growth since 2003, the fastest after China among the world's major economies, Bloomberg reported.

“In view of the criticality of anchoring inflation expectation, a continuous heightened vigil over ensuing monetary and macroeconomic developments is warranted to enable swift responses with appropriate measures as necessary, consistent with the monetary policy stance,'' the bank said in the statement.

Traders also expect the rupee to rise from near a 14-month low to reduce the import cost of fuel, food and other products.

Before today, Reddy had raised the repurchase rate eight times in the past 2 1/2 years and increased the cash reserve ratio seven times since December 2006 to slow money supply and cool inflation.

“A tight monetary stance will have to continue for another year to slow inflation to the desired level,'' said Rajiv Kumar, a former policy adviser in the finance ministry between 1992 and 1995 who is now the director of the Indian Council for Research on International Economic Relations. “Growth could come down to as low as 6.5 percent by 2010.''