India looks to curb inflation

India's central bank yesterday acted to clamp down on the country's soaring inflation by aggressively tightening key interest rates and bringing in curbs on lending. It also lowered the projection for India's economic growth from 8.5 per cent to around 8 per cent.

The Reserve Bank of India (RBI) increased its benchmark interest rate - the rate at which it makes short-term loans to commercial banks - half a point to 9 percent. This was a quarter more than analysts had expected and puts rates at a seven-year high.

At the same time it increased the so-called cash reserve ratio, or the share of deposits that banks must keep on hand, by 25 basis points, to 9 per cent. Experts say that both steps can help lower inflation.

Inflation has quickly become a serious problem for India. Earlier this month it hit a 13-year high when it reached 11.89 per cent after a series of increases in the cost of petrol, cotton, rice and building materials. The increases have hit hard at India's overwhelmingly impoverished population which has few savings to turn to in times of hardship.

"A realistic policy endeavour would be to bring down inflation from the current level of about 11-12 per cent to a level close to 7 per cent by March 31, 2009," said the bank's governor, Venugopal Reddy. "Inflation has emerged as the biggest risk to the global outlook, having risen to very high levels across the world, levels that have not been generally seen for a couple of decades."

Soaring costs have created political problems for the government headed by Prime Minister Manmhan Singh, the man whose term as India’s finance minister in the 1990s is credited with introducing many of the economic reforms responsible for the country's impressive growth. Last week Mr Singh and his Congress Party-led coalition survived a confidence vote in parliament but he still faces tough months ahead of a general election that must be called before next May.

In explaining its decision, the central bank said tackling inflation was a priority even over growth. Mr Reddy added: "Compared to a drop in growth rates all over the world, it's a marginal drop. This growth is consistent with stability."