The Reserve Bank of India (RBI) is trying to reduce stubbornly high inflation, which has stayed above 8% for the past 18 months. It raised interest rates by 0.25% to 8.5% this week. The central bank has raised interest rates by 3.75% since March last year, the fastest round of tightening in its 76-year history. Growth slowed to 7.7% in the three months to June, the slowest pace in two years.
What the commentators said
While other major emerging economies such as Turkey, Indonesia and Brazil have all cut interest rates recently to temper the impact of a global slowdown, India “doesn’t have that luxury”, said Harsh Joshi in The Wall Street Journal. Persistent inflation – leaving India with the highest rate among major emerging markets – gives it “little room to manoeuvre”, even as growth ebbs away. Manufacturing grew at its slowest pace in two years in September, and industrial production is rising by just 4.1% year-on-year.
A key reason why inflation in India is so stubborn is supply constraints, noted HSBC’s Leif Eskesen. A lack of basic infrastructure, skills gaps and rigid labour and product markets raise costs. Meanwhile, poor irrigation means that low rainfall increases the cost of food. But it hardly helps that the government fuelled demand, said Lex in the FT. It raised spending by 4% of GDP last year, as Lex pointed out in the FT. As the rupee falls, and thus further adds to the inflation problem, New Delhi “must heed the call” from the Bank to tighten fiscal policy.