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Indian interest rates rise to 9% | Indian interest rates rise to 9% |
(about 2 hours later) | |
India's central bank has increased its key interest rate to 9% from 8.5% in a bid to dampen surging inflation. | India's central bank has increased its key interest rate to 9% from 8.5% in a bid to dampen surging inflation. |
It is the third time in two months that Indian interest rates have risen and more rate rises are expected. | |
Inflation is running at a 13-year high, driven by the soaring cost of food and fuel which is biting into the spending power of India's poor. | |
Many Asian countries are facing the same problem, threatening to curb rapid economic growth. | Many Asian countries are facing the same problem, threatening to curb rapid economic growth. |
In an attempt to discourage lending, the Indian Reserve Bank also raised the level of minimum cash reserves banks must hold in relation to customer deposits. | |
India's main stock index, the Sensex, tumbled after the rate rise on worries that car and home loans will become more expensive, slowing consumer spending. | India's main stock index, the Sensex, tumbled after the rate rise on worries that car and home loans will become more expensive, slowing consumer spending. |
It closed down 557.6 points, or 3.9%, at 13,791.54 - a one-week low. | |
"The hikes were above consensus. We expect lending and deposit rates to rise further and growth to slow significantly," said Macquarie Securities analyst Seshadri Sen. | |
But Reserve Bank Governor Y. Venugopal Reddy said that compared with the rest of the world, the drop in growth rates would be marginal. | |
Main priority | Main priority |
The Indian economy has been growing by more than 8% a year so far in 2008. | |
Capital investment, rising incomes and availability of credit have helped to fuel this expansion, but this has also fed into higher domestic prices. | |
The high prices of crude oil - India imports two-thirds of its oil requirements - and steel products have also been blamed for stoking inflation. | |
To help combat this, the government has cut duties on these products. | |
In addition, the government has also cut exports of rice to try to keep domestic prices down. | |
Wider problem | |
The governing party is keen to ease inflation pressures as it prepares to fight an election scheduled for the first half of next year. | |
But interest rates are still expected to go higher, even if growth suffers as a result. | But interest rates are still expected to go higher, even if growth suffers as a result. |
"Bringing down inflation from the current high levels and stabilising inflation expectations assumes the highest priority in the stance of monetary policy," the Indian Reserve Bank said in a statement. | "Bringing down inflation from the current high levels and stabilising inflation expectations assumes the highest priority in the stance of monetary policy," the Indian Reserve Bank said in a statement. |
Pakistan is also dealing with similar problems. | |
Its benchmark share index also fell after the country's central bank raised its main interest rate to 13% from 12% in an attempt to bring inflation back to target levels. |