Photo: mckaysavage via Flickr
The Reserve Bank of India (RBI), India’s central bank, raised benchmark lending rates by 25 basis points to curb stubbornly high inflation. The repo rate was raised to 7.5% and the reverse repo rate increased to 6.5%. This has been the tenth rate hike since March 2010.The markets saw a sell-off with the Bombay Stock Exchange falling 0.81%.
India’s food inflation eased from to 8.96% in the week ending June 4, from the previous week. Food inflation is measured by Wholesale Price Index (WPI) and stood at about 21% a year ago. Prices were reported to have fallen on account of cheaper pulses which were down 10% year-over-year and vegetables that were down 1.39% y-o-y, according to The Times of India.
What’s worrisome however is that not all prices went south. Fruits soared nearly 30%, milk was up 10.59%, while eggs, meat and fish rose 7.31% on an annual basis. The prices of onions that first alarmed the country in December last year soared 12.17% and potatoes by 1.14%.
The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has said India’s agriculture sector needs to grow at 4% every year to support its burgeoning population. It also reported that the government had been under-investing in the agricultural sector, which needs to change if the government hopes to keep food prices low.
Meanwhile, the RBI reported that the government’s cash balances moved from a surplus of Rs. 890 billion on an average during Q4 of 2010-11, to a deficit of Rs. 290 billion during Q1 of 2011-12 (up to June 15, 2011).
The economy has been buckling under pressure from the rate hikes. The economy grew at 7.8% in the quarter from January to March, down from 8.3% the last quarter, according to Reuters. Meanwhile investment growth slowed to 0.37% for the period down from 7.8% the previous quarter.
The RBI however has categorically said that inflation is its biggest concern:
Going forward, notwithstanding both signs of moderation in commodity prices and some deceleration in growth, domestic inflation risks remain high. Against this backdrop, the monetary policy stance remains firmly anti-inflationary, recognising that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control.
Business Insider Emails & Alerts
Site highlights each day to your inbox.