MUMBAI, India: India hiked key interest rates by a quarter point Thursday — its eighth hike in a year — warning that rising oil prices will aggravate already high inflation in Asia's third-largest economy. The Reserve Bank of India also raised its inflation forecast for the year from 7 percent to 8 percent on high crude prices and rising manufacturing costs, saying that its current anti-inflationary stance is likely to continue despite instability in the Middle East and natural disasters in Japan. “The underlying inflationary pressures have accentuated, even as risks to growth are emerging,” the bank said. As expected, the central bank raised the repo rate — its short term lending rate — from 6.5 percent to 6.75 percent with immediate effect. It raised the reverse repo rate — its short term borrowing rate — by 5.5 percent to 5.75 percent. The move disappointed business leaders, who say the rising cost of finance and materials is already weakening confidence and crimping growth. “RBI's action in raising policy rates though expected will adversely affect growth prospects”, said Rajiv Kumar, the director general of the Federation of Indian Chambers of Commerce and Industry, a major business lobby. Central banks across Asia have raised rates in their fight against inflation, but India has been more aggressive than most. While India's Reserve Bank continues to prioritize its anti-inflation battle, it is clearly grappling with new fears that sweeping political change in the Middle East and last week's catastrophic earthquake and tsunami in Japan will hamper global growth. Despite a largely domestic driven economy, India's reliance on oil imports and the impact of short term foreign fund flows on capital markets and currency make it vulnerable to global events. India imports about three-quarters of its oil and the government pays hefty subsidies on fuel and fertilizer. That means rising crude prices threaten not just inflation, but also the sizable current account and fiscal deficits.
