MUMBAI, India (AP) _ India's central bank on Tuesday tightened monetary policy more than expected to rein in soaring inflation and lowered the country's economic growth projection to around 8 percent from 8.5 percent, sending the stock market into a downward spiral.

The Reserve Bank of India increased its benchmark interest rate - or the repurchase rate, the rate at which it makes short-term loans to commercial banks - half a point, to 9 percent, a quarter point more than analysts had expected.

The bank also increased the cash reserve ratio, or the share of deposits banks must keep on hand, by 25 basis points, to 9 percent. Both measures can help cool inflation.

Inflation hit a 13-year high of 11.89 percent in July, after months of steep increases in the cost of gasoline, steel, cement, cotton and rice. Rising prices have become a major political issue for Prime Minister Manmohan Singh's government which faces national elections in less than a year.

"A realistic policy endeavor would be to bring down inflation from the current level of about 11-12 percent to a level close to 7 percent by March 31, 2009," Reserve Bank Gov. Y. Venugopal Reddy said in a statement accompanying the bank's first quarter review of monetary policy for the current fiscal year.

The bank indicated it would continue to prioritize inflation over growth.

"Inflation has emerged as the biggest risk to the global outlook, having risen to very high levels across the world, levels that have not been generally seen for a couple of decades," the bank said.

"Liquidity management will continue to receive priority," it added.

Speaking to reporters, Reddy defended the nation's moderating growth. "Compared to a drop in growth rates all over the world, it's a marginal drop," he said. "This growth is consistent with stability."

Indian shares dove sharply in response, on worries that the cost of home and car loans would soar as credit tightens.

The Bombay Stock Exchange's benchmark 30-stock Sensex dropped 3.89 to 13,791.54 points.

On the broader National Stock Exchange, the 50-company S&P Nifty index declined 3.3 percent to 4,189.85 points.

"With this tightening, the central bank has come out strongly against inflation," said Tushar Poddar, vice president for Asia economic research at Goldman Sachs, in a research report Tuesday. "We think that much higher interest rates will slow investment demand and growth, with the impact felt particularly in FY10," he said.

Goldman recently downgraded GDP growth forecasts for fiscal year 2010 by a percentage point, to 7.2 percent, and expects inflation to remain in the double digits through the end of the year, before falling off in 2009. Goldman expects the Reserve Bank of India to tighten credit again in October.

The Confederation of Indian Industry, a business group, said Tuesday that it remained optimistic about sustained growth, even in the face of tighter money supply.

"Many sectors are operating at close to full capacity and are therefore planning capacity expansions. Such capacity expansions would fuel investment demand and keep the growth momentum strong," the group said in a statement.

Central banks in the Philippines, Indonesia, and Thailand have all raised rates in recent months, as policy makers across the region struggle to contain inflation without undermining growth.

comments powered by Disqus