India Rate Hikes Fail to Tame Stubborn Inflation

Devan Biswas
02 Nov, 2010
New York City

Stocks traded sideways as the Reserve Bank of India lifted rates for the sixth time this year. The rate hikes have failed to tame elevated food prices and stubborn inflation and record property and asset prices.

India Rate Hikes Fail to Tame Stubborn Inflation

[R]5:30 PM Mumbai – Stocks traded sideways as the Reserve Bank of India lifted rates for the sixth time this year. The rate hikes have failed to tame elevated food prices and stubborn inflation and record property and asset prices.[/R]

Stocks in Mumbai traded sideways after Reserve Bank of India lifted rates for the sixth time this year to tame inflation. The widely expected move raised the repo rate by 25 basis points to 6.25% and reverse repo rate by the same to 5.25%.

The BSE Sensex fell 0.18% or 36.59 to close at 20,319.04. The CNX Nifty on the National Stock Exchange rose 1.45 to close at 6,119.00.

RBI also noted its economic assessment that asset price inflation is stubborn and prices of gold, property and stocks are at elevated levels. The central bank tightened home lending conditions but also suggested that it is not planning any new rate hikes in the near future.

The sharp inflow of foreign funds and rising domestic wages and food prices has kept the RBI on alert for inflation. Various inflation indexes suggest inflation to run between 14% and 16% and rate hikes have failed to tame inflation in the last two years.

Taming inflation has been a central challenge for the monetary policy makes and food inflation has been at double digit level despite the improved monsoon rainfall. The inability of the policy makers to contain food inflation had fed into inflationary expectations that have also lifted wage pressures.

The sixth hike of inflation this year each of 25 basis points has not slowed the money supply and new loan generation by banks.

RBI also left its estimate of economic outlook at 8.5% from its last assessment in July and said that data from industrial and service sector indicate “continued momentum.”

Foreign reserves at the end of last week in October stood at $294.5 billion and the central bank estimated current account deficit to exceed 2.9% deficit in the last fiscal year ending in March 2010.

Bajaj Auto Ltd. rose 1% after sales increased 32%. DLF Limited plunged 3.5% after RBI tightened home lending and raised rates. Emami Limited surged 5.4% after net profit gained 45.3%. GlaxoSmithKline rose 1% after net profit rose 31%. PVR Limited gained 3% net profit rose 39.3%.

Century Enka Limited decreased 2.9% to Rs 235.10 after the synthetic yarn maker reported second quarter net profit plunged 55.3% to Rs 14.63 crore.

DLF Limited plunged 3.5% to Rs 348.15 after the Reserve Bank of India tightened provisioning norms for home loans.