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India raises interest rates to curb inflation

By Sumnima Udas, CNN
Reserve Bank Governor Duvvuri Subbarao has said bringing down India's inflation rate is more important than short term growth.
Reserve Bank Governor Duvvuri Subbarao has said bringing down India's inflation rate is more important than short term growth.
  • Reserve Bank of India raises key interest rates
  • Inflation climbed to 9.06 percent in May
  • Analysts say the government wants to tame inflation even at the expense of growth
  • India

New Delhi (CNN) -- In an attempt to curb runaway inflation, India's central bank raised its benchmark interest rates for the tenth time in sixteen months on Thursday, despite a slowdown in economic growth.

The Reserve Bank of India said in a statement that inflation had reached "uncomfortable levels" and increased the repo rate at which it lends to commercial banks by 25 basis points to 7.5 percent.

The reverse repo rate at which the central bank pays commercial banks for deposits was raised to 6.5 percent.

These measures come as government data this week showed Indian's inflation climbed to a higher-than-expected 9.06 percent in May from a year earlier, driven mainly by an increase in prices of manufactured goods.

But the central bank's previous rate hikes have made little difference in the cost of living in India.

"If India is to grow in a fast pace then demand must increase and an approach for controlling demand by hiking interest rates will not exactly increase the growth rate or the development of this economy," economic adviser to the Federation of Indian Chamber of Commerce and Industry Anjan Roy said.

India now has the highest inflation rate of any large Asian economy.

Analysts say the government's priority is to tame inflation even if its at the expense of economic growth.

Reserve Bank Governor Duvvuri Subbarao said in a statement last month that bringing the current elevated rates down should "take precedence even at the cost of some growth in the short run."

The government has delayed a decision to hike diesel fuel prices fearing it would further stoke inflation.

"Inflation is a very important factor in India, in fact the fortunes of governments depend on the course of inflation particularly food items, so it is predictable that the RBI will take this course," Roy said "but to be honest inflation in India has proven to be insensitive to interest rate hikes. Inflation is going up and interest rates are going up."

Roy said the Indian government must now take a supply side management approach to curb rising prices.

Asia's third largest economy grew 7.8 percent from January to March, the slowest pace in five quarters.

Analysts say the slower growth is making it harder for the second-fastest-growing major economy in the world to pull hundreds of millions of people out of poverty.