MUMBAI, July 29, 2008 (AFP) – India’s central bank Tuesday raised its key short-term lending rate by half-a-percentage point in an aggressive bid to tame inflation riding at a 13-year high, pushing shares down sharply.
Indian shares slumped 3.6 percent after the bank announced the hike in the repo rate, at which commercial banks borrow funds from the central bank, amid investor fears that the move it would hit corporate profits.
The repo rate was hiked by 50 basis points to nine percent, while the cash reserve ratio — the sum banks must keep on deposit — was increased by a quarter point to nine percent.
“Globally, inflationary pressures brought on by the elevated prices of crude, metal and some food prices show no signs of abating,” Reserve Bank of India governor Y. Venugopal Reddy said in a statement.
“Looking forward, global and domestic factors pose severe challenges to monetary policy management and warrant reinforced policy actions,” he said.
The repo rate rise was at the higher end of analyst expecations.
The bank also cut its growth forecast for the financial year to eight percent from 8.5 percent, saying the global economic outlook was “fraught with uncertainty.”