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India Announces Another Interest Rate Hike

India's FM Mukherjee (file photo)

India's FM Mukherjee (file photo)

India's Reserve Bank has raised interest rates in a continuing struggle to control inflation. The rate hike, which was announced Friday, is the 12th increase in the last year-and-a-half. But there are fears that this could further slow down an economy that has begun losing some momentum.

The Reserve Bank's 0.25 percentage point increase to 8.25 percent was widely anticipated.

The bank's move is an effort to control inflation, which continues to remain high despite the steady rise in the cost of borrowing money over the last 18 months.

Inflation was about 9.75 percent in August, the highest in the last 13 months.

Economic slowdown

However, while prices continue to rise, the economy has begun to slow down.

Finance Minister, Pranab Mukherjee, hopes the economic momentum will revive.

"There are also signs of growth being affected by the monetary tightening," he said. "I hope the measures taken will get us back to a more comfortable inflation situation earlier rather than later while having scope for growth to pick up in the second half of the year."

Economic growth in India came down to 7.7 percent in the second quarter - the slowest in the last 18 months.

Cause for concern

That is causing some worries, and several economists have begun to question the measures being taken by the Reserve Bank to fight inflation.

Among them is economist D.H. Pai Panandiker at the RPG Goenka Foundation in New Delhi.

"Apparently this was done to check inflation, but all it has done is check growth. If for one year they have been unable to do it, they must rethink about that policy," he said.

The interest rate hike came a day after oil companies raised the price of gasoline by five percent to compensate for the higher cost of buying crude oil. India imports most of its crude requirements.

Impact on consumer

Both political allies of the Congress led government and opposition parties have slammed the latest hike in gasoline prices and demanded a rollback.

Rajnath Singh, the leader of the main opposition Bharatiya Janata Party, says rising oil prices and interest rates are hurting common people.

Singh adds that government appears to have lost its grip on the economy and is directionless in handling the situation.

However, officials say gasoline prices are rising because the government no longer controls the prices but has allowed oil companies to link them to market rates.

Finance Secretary Montek Singh Ahluwalia says efforts have to be made to control inflation. But he says this cannot be done by holding down energy prices.

"Frankly, internationally and globally people believe that countries that can absorb energy prices that exist globally are much more likely to grow rapidly than countries that suppress it," said Ahluwalia.

However the persistently high inflation is causing widespread public anger and leading to loss of popular support for the government.