India's central bank raised its benchmark interest rate for the second straight month to fight accelerating inflation, while further easing emergency liquidity curbs that were imposed in July to support the rupee.
Governor Raghuram Rajan boosted the repurchase rate to 7.75 percent from 7.5 percent, the Reserve Bank of India said today, as 32 of 42 analysts in a Bloomberg News survey predicted. He cut the marginal standing facility rate to 8.75 percent from 9 percent, making short-term funds cheaper for banks following a July cap on borrowing at the repurchase rate.
Consumer prices are climbing almost 10 percent even as economic growth slows, hurting the roughly 800 million Indians living on less than $2 per day as the cost of everything from onions to clothing surges. The rupee pared losses after today's decision, which Rajan said seeks to quell inflation pressures. Pramerica Asset Managers Pvt. and Crisil Ltd. expect another increase in borrowing costs at the next meeting in December.
"Rajan has made it clear he will not play to the gallery and his priority is inflation," said Mahendra Jajoo, Mumbai-based chief investment officer at Pramerica. "He'll continue to raise rates until price pressures come down."
The rupee, down 12 percent against the dollar over the past year, erased losses after the decision and was 0.2 percent stronger at 61.385 per dollar as of 4:08 p.m. in Mumbai. The S&P BSE Sensex rose 1.7 percent. The yield on the 10-year government bond fell to 8.57 percent from 8.66 percent yesterday.
The rupee has appreciated 9.3 percent since Sept. 4, when Rajan announced concessional swaps windows for banks to attract dollars. The RBI has garnered $12.1 billion so far from that step, he said in the briefing. The currency's climb in the period is the biggest gain in the world.
Rajan reiterated that India's expansion may be set to accelerate, helped by farm output, exports and Prime Minister Manmohan Singh's efforts to speed up implementation of major investment projects. Singh faces a general election by May.
David Fuller's view I would love
to know who is buying Indian shares (weekly
& daily), because one seldom hears
a favourable word about its economy in the Western press. Moreover, most articles
over the last few years have focussed on depressing social issues.
Nevertheless, India has a competent and hugely experienced Prime Minister in the distinguished economist Manmohan Singh, albeit one who has too often been handicapped by an impossible coalition government in terms of any economically sensible policies. Moreover, Singh is now 81 and the Congress Party will soon be led by the inexperienced Rahul Gandhi. I suspect next year's General Election is the main factor behind India's steady stock market stock market performance, not least because BJP leader Narendra Modi has been chosen for his economic success as Chief Minister of Gujarat.
Technically, the 10-year chart of the BSE Sensex Index above shows that it is testing historic numerical highs from 2008 and 2010, after what has been a volatile year. This makes forecasts challenging but the build-up of technical support since August 2011 remains encouraging. I maintain that India's stock market could take off if Narendra Modi were to win with a workable majority