While the lending rate is at a 26-month high, Societe Generale analyst Joseph Lau anticipates two or three hikes and a 7.5% rate by Q3 2011. He doesn’t however project any immediate impact on India’s GDP growth.
This Societe Generale chart shows the trajectory of lending rates and India’s year-over-year inflation index (the wholesale price index) since 2005. The 2009 drop in inflation reflects a period of slow economic growth in the country when the bank slashed rates to stimulate the economy.
Photo: Societe Generale
A statement issued by the bank projected year-over-year March WPI inflation to stand at about 8%, higher than earlier expectations. Oil price volatility spurred by protests in the Middle East and North Africa, rising inflation in the Euro zone and UK, and Japan’s potential switch away from nuclear energy were cited as causes for concern.
The central bank hopes that this rate hike will continue to control demand-side inflation and contain a spillover to core. It is also likely to stick with its aggressive anti-inflationary stance and raise rates again this year. The BSE Sensex fell 1.14% on Thursday.
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