Tuesday, May 3, 2011

India Raises Interest Rates 50 BP

From the WSJ:

India's central bank raised its lending rate by 0.50 percentage point Tuesday and announced a new monetary policy framework, escalating its fight against inflation even as it lowered its forecast for this year's economic growth.

The Reserve Bank of India, which usually increases lending rates by 0.25 percentage point at a time, on Tuesday raised a key lending rate by an unexpected 0.50 percentage point to 7.25%, highlighting the urgency of taming price pressures that threaten to dampen the country's economic growth.


With Tuesday's hikes, the RBI has raised the repo rate by 2.50 percentage points and the reverse repo rate by 3.00 percentage points in little over a year.


The RBI's attempts to tame inflation have been insufficient so far. Originally driven by food prices, inflation in recent months has hit manufactured goods as well, raising the specter of a wage-price spiral.

Headline inflation came in at 8.98% in March, nearly a full percentage point higher than the RBI's estimate of 8%.

The RBI expects the economy to expand around 8% in the current fiscal year, lower than the 8.6% the economy is estimated to have grown last fiscal year. The government expects the economy to grow as much as 9.25% this fiscal year.

While Brazil has lower overall inflation, they are in the same position: they have a growing economy that has inflationary pressures building up. As such, they will probably continue to raise rates as well.

This has important implications for the US dollar. As other countries raise their interest rates, their currencies will appreciate in value relative to the dollar, thereby lowering the dollar's value. In addition, most of these countries also have a higher growth rate -- another attraction for currency traders. In short, this news adds downward pressure to the dollar.