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March 17, 2011    

India lifts interest rates further to combat inflation

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by Kay Murchie

The Reserve Bank of India (RBI) has today raised key interest rates for the eighth time in less than a year, in a bid to tame stubbornly high inflation in a thriving economy.

The move, which was widely expected, saw the central bank raise its repo rate, at which it lends to banks, to 6.75%, and its reverse repo rate, at which it borrows from banks, to 5.75%.

The cash reserve ratio, the level of deposits that commercial banks must keep with the central bank, remained unchanged at 6%

The Indian economy, which is the world’s second fastest-growing major economy behind China, grew by a staggering 8.9% on an annual basis in the July to September period.

Its growth has been fuelled by manufacturing, services and a strong farm sector.

However, the economy faces headwinds – the country’s inflation rate is the highest among the Group of 20 leading nations, due to soaring food costs.

The RBI has previously said one of its main priorities is to bring down inflation and it is forecasting it to fall to around 7% by the end of March. It is currently around the 8.3% mark.

Annual food inflation has surged, causing major problems for the 450 million people who live below the poverty line in the country.

Prime Minister, Manmohan Singh, has warned that the country’s rapid economic growth is under “serious threat” from inflation and said taming inflation was a matter of urgency.

However, analysts believe that rate hikes could hit growth and reduce the chances of the economy achieving double-digit expansion.

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