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Accelerating Inflation Triggers Fears Of Rate Hike By RBI

RBI 121713

With Inflation in India at a 14-month high, fears of an interest rate hike by the nation's central bank are ruling high despite the rationale that an upward adjustment to rate could deal another blow to economic activity.

The repo rate is expected to be lifted by a quarter point to 8.00 percent at a meeting on December 18. The repo rate is the rate at which the Reserve Bank of India lends to banks.

Governor Raghuram Rajan has raised the key rates twice this year after taking the helm at the central bank in September.

Stubbornly high inflation and subdued economic growth has continuously been conflicting factors on the rate decision. Rajan's measures helped the rupee appreciate from a record low seen in August.

The acceleration in inflation is the latest trigger factor for rate hike concerns. Inflation based on the wholesale price index, rose to 7.52 percent in November, a 14-month high, from October's 7 percent.

At the same time, consumer price inflation hit a record 11.24 percent in November, up from 10.17 percent the prior month.

On the economic activity front, industrial production decreased 1.8 percent year-on-year in October, reversing the previous month's 2 percent increase. However, recent Purchasing Managers' survey as well as gross domestic product suggested that the economy has bottomed out.

During the quarter ended September, India's economic growth rose to 4.8 percent from a four-year low, on strong farm output figures. Nevertheless, the country logged a sub-5 percent growth for the fourth successive quarter.

The results of the Purchasing Managers' survey showed that manufacturing returned to positive territory in November, with the increase in incoming new work leading companies to raise their production levels for the first time since April.

Moreover, the trade deficit narrowed to $9.2 billion in November, driven by declines in the imports of gold and oil. The government has initiated a slew of measures, including lifting import duty on gold and silver, to contain the ballooning current account deficit.

The Asian Development Bank forecast 4.7 percent economic growth for India in the fiscal year 2013 on the back of a rebound in exports and higher industrial and agricultural outputs. For 2014, the growth is seen at 5.7 percent.

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