India's central bank hikes cash ratio, key rates unchanged

August 1, 2007 - 0:0

MUMBAI (AFP) -- India's central bank on Tuesday warned inflation was still a risk and hiked its cash reserve ratio for banks by 50 basis points to seven percent but kept short-term borrowing rates unchanged.

The Reserve Bank of India said in a quarterly review that while inflation had fallen below its five percent forecast for the year to March 2008 from nearly seven percent earlier this year, commodity and asset price rises remained a concern.
""While inflation has been steady, inflationary pressures remain and are more persistent than before, along with high commodity and asset prices,"" central bank governor Y.V. Reddy said in a statement.
Inflation accelerated to 4.41 percent in the latest data for the week to July 14 from 4.27 percent the previous week.
""This is a surprisingly nervous (policy) in relation to inflation. It is the most hawkish stance the bank has taken relating to financial risks,"" said Manika Premsingh, economist with brokerage BRICS Securities.
Analysts had expected the central bank to keep its benchmark repo rate at a four-year high of 7.75 percent, which was reached after five hikes between June 2006 and March this year in an effort to tame inflation in the fast-growing economy.
India grew 9.4 percent in the year ended March and the central bank has forecast growth to slow to 8.5 percent this year, a prediction that was reaffirmed on Tuesday.
But despite the forecast of slower growth, the central bank said billions of dollars of foreign investment in the stock market this year had flooded banks with cash that was fuelling a boom in consumer and business spending.
The hike in the cash reserve requirement, due to take effect August 4, was aimed at removing some cash available for loans, the central bank said, adding the policy would continue for the next several months.
""The bank will continue with its policy of active demand management of liquidity,"" the central bank statement said