Accelerating inflation prompted the Reserve Bank of India to raise its cash reserve ratio to a seven-year high only last week, with the central bank unexpectedly raising the cash reserve ratio to 8.25 percent from 8 percent. This is now the highest level since March 2001. The Indian government is also attempting to use administrative measures, and recently scrapped import duties on steel products - including pig iron, hot-rolled coils, ferrous alloys and zinc - and imposed an export tax on the overseas sales of some other steel products to augment local stocks.
The Reserve Bank of India now expects inflation of as much as 5.5 percent in the coming financial year (to March 31 2009), higher than last years target of 5 percent.
Finance Minister Palaniappan Chidambaram yesterday said he doesn't expect commercial lenders to raise interest rates after the central bank asked lenders to set aside more money. Banks are ``quite happy that only the cash reserve ratio has been hiked and policy rates have been untouched,'' Chidambaram said after meeting the chief executives of state- owned banks in New Delhi.
Central bank Governor Yaga Venugopal Reddy is reluctant to increase interest rates on concern it will further weaken an economy that the central bank expects will grow at the slowest pace since 2005 this year. India's $912 billion economy, Asia's third largest, may expand between 8 percent and 8.5 percent this year, the central bank said, after record average growth of 8.7 percent in the previous five years.
Meanwhile the rupee had its worst week in almost nine months this week as local companies bought more dollars to pay for imports. The rupee weakened to the lowest level in more than a month as the dollar rebounded against the euro and the yen on signs the Federal Reserve is finished with its interest-rate cuts after it said on April 30 that the seven reductions starting September were ``substantial.'' Demand for the U.S. currency also rose as refiners bought it to pay for oil shipments after the price of oil reached an all-time high this week.
The rupee declined 1.3 percent this week to 40.655 per dollar at the 5 p.m. close in Mumbai - that's the biggest fall since the five-day period ended August 17.
The value of Indian imports grew 27 percent to $236 billion in the fiscal year ended March, widening the trade deficit by 45 percent to $80.4 billion, the Commerce Ministry said yesterday. The problem is that the rupee's 3.2 percent decline so far this year may accelerate inflation. This danger alone may prompt the central bank to raise its benchmark interest rate for the first time in more than a year.
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