India's central bank raised interest rates for the second time this month and asked lenders to set aside more money as reserves to cool inflation are running at a 13- year high, Bloomberg News reports.
The repurchase rate was lifted to 8.5 % from 8 % and the cash reserve ratio to 8.75 % from 8.25 %, the Reserve Bank of India said in a statement. The move comes after the central bank increased its repurchase rate by a quarter percentage point to 8 % on June 11.
Governor Yaga Venugopal Reddy is under pressure from the finance ministry to tighten monetary policy to rein in inflation, currently at 11.05 %. That will further hurt consumer and investment demand and threatens to derail India's record 8.8 % economic growth since 2003—the fastest after China among the world's major economies.
``A tight monetary stance will have to continue for another year to slow inflation to the desired level,'' 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 told BN. ``Growth could come down to as low as 6.5 % by 2010.'' He spoke before the central bank's rate announcement.
With general elections scheduled to be held in less than a year, Prime Minister Manmohan Singh wants to control prices in a country where more than half the population of 1.1 billion live on less than $2 a day.
India's inflation rate has almost tripled this year, eroding the popularity of Singh's ruling Congress party, which lost ground in nine of 11 state elections since January 2007.
China told lenders to set aside more money for a fifth time this year on June 7 to cool inflation that is close to a 12-year high. Banks must put aside a record 17.5 % of deposits as reserves from June 25.
India has supported monetary policy steps with tax cuts to ease prices. On June 4 the government scrapped taxes on imports of crude oil and reduced duties on other fuel products, foregoing $5.3 billion of revenue to cushion consumers from high fuel costs.