India steps up fight to tame inflation

India's central bankers stepped up their efforts to rein in the pace of price rises in the fast-growing economy with a 50 basis point hike in interest rates yesterday.

The Reserve Bank of India increased the repo rate, or the rate at which it lends money to banks, to 8 per cent, surpassing market expectations of a 25 basis-point rise. Yesterday's action marks the 11th time that the RBI has raised rates to stave off the threat of overheating in the economy since March last year. Despite the aggressive monetary policy, however, inflation on the wholesale price index stood at more than 9 per cent last month.

Earlier, the RBI's quarterly report, published on Monday, confirmed that the bank intended to maintain its stance of fighting price rises with ever-tighter policy. "Persisting high inflation and its expected slow decline warrant that the Reserve Bank continue with its anti-inflationary policy stance," the report said, adding that inflation could climb higher as global commodity prices feed through to the Indian economy.

Although it grew at a slower-than-expected pace in the three months to the end of March, Asia's third largest economy still managed to expand by 7.8 per cent.

Gaurav Kapur, an analyst at RBS, said that while the 50 basis-point hike was a surprise, the central bank's action was "clearly a pre-emptive step to bring inflation down to 7 per cent by March 2012."