The Reserve Bank of India raised the benchmark rate to 8 percent this week, joining in the process central banks in Brazil, China and Russia (among others) in increasing borrowing costs to combat inflation even as economic growth slows. India's central bank on June 4 raised its repurchase rate to a six-year high of 8 percent from 7.75 percent, following two increases in the cash reserve ratio in April.
India's inflation in the last week of May was the fastest since February 2001. Price gains in Pakistan also accelerated to 19.3 percent in May, the highest in 30 years, while inflation in Vietnam was running at 25.2 percent, the fastest since 1992, and in Indonesia consumer prices were up 10.4 percent from a year ago.
Central banks in Indonesia, the Philippines, Vietnam and Pakistan have all increased borrowing costs over the last two months to tackle inflation. China, where retail sales grew in May at close to the fastest pace in nine years and inflation has risen above 8%, raised its cash reserve requirements for banks this week for the fifth time since the start of the year - up to 17.5 percent with effect from June 25.
According to data from the RBI current account bank deposits barely moved in May, rising by a mere Rs 748 crore, while longer term deposit accounts went up sharply by Rs 60,759 crore. Much of the deposit growth is being attributed to poor stock market performance and the prospect of higher interest rates which may well be prompting investors to move their money into bank deposits. On the other hand bank lending is significantly down year on year, rising by only Rs 43,000 crore in May.
Industrial Output
India's industrial production, which accounts for a quarter of the $912 billion economy, increased 7 percent in the month of April, slower than the 11.3 percent gain in the same month a year ago, the government said yesterday. The economy is likely to grow by around 8.5 percent this year, the slowest pace in four years.
Foreign Exchange Reserves
India's foreign exchange reserves rose to $315.660 billion as on June 6, from $314.614 billion a week earlier, the central bank said in its weekly statistical supplement on Friday. This means foreign exchange reserves were up $1.05 billion during the week. Almost the entire growth was on account of the rise in foreign currency assets which rose $1,045 million during the week.
Reserves hit a record high of $316.171 in late May and have since slid back slightly.
The Rupee
The rupee, which is the second-worst performer this year among Asia's 11 most-active currencies, declined for a second consecutive week as losses in local stocks spurred fund outflows. The rupee dropped 0.6 percent on the week closing at 42.94 per dollar Friday in Mumbai.
This was the rupee's worst week in a month, and follows the move by overseas funds to sell more local equities than they bought on seven of the eight trading days in June. India's benchmark stock index fell for a fourth week, the longest losing streak since February, on concern that rising inflation will mean slower growth and will also erode the value of the return on investment.
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