Print options

December 15, 2011

India Holds Interest Rates Steady Amid Economic Slowdown

by Anjana Pasricha

As India struggles with an economic slowdown, the central bank has decided to hold interest rates steady. A series of aggressive rate hikes in the last 18 months have been partly blamed for dampening growth.

Five months ago Trishna Chaudhuri, 33, and her husband took a loan to buy an apartment in Gurgaon near New Delhi. But since then, interest rates have gone up. As a result, says Chaudhuri, they have to fork out nearly ten percent more every month toward the repayment of their home loan.    

"It has increased twice since our loan started.  For a household budget, it does disrupt it," Chaudhuri said.   

That is why Chaudhuri was relieved by the Central Bank's announcement on Friday that interest rates will not be raised.

Millions of middle-class Indians, who were snapping up cars and homes months ago, have since slowed down on their purchases. Loans have become more expensive with 13 interest rate hikes since last March.  

These aggressive hikes were meant to cut inflation. But economists say they have slowed down an economy which was racing along at nearly 9 percent, and which relies heavily on domestic consumption. Industrial output fell by as much as 5.1 percent in September.

Indian Finance Minister Pranab Mukherjee, who has been stressing on the need to revive growth, is welcoming the central bank's decision to pause interest rate hikes.    

"I am hopeful today's announcement should help in regaining our growth momentum with improved macroeconomic parameters," said Mukherjee.

However business leaders are not satisfied. They want the central bank to cut interest rates to encourage investment and give businesses access to more affordable financing. They say lowering interest rates will also bring consumers back into the market.

Business leaders point out that a key barometer of consumer confidence, car sales, has taken a hit.  Auto sales are expected to grow by less than 5 percent this year compared to 30 percent last year.    

Economists say that the central bank will begin to lower interest rates once inflation is under control. Inflation has slowed to a one-year low of about 9 percent, but still remains high. However, officials are confident that it will moderate even further in the weeks to come.

Inflation, particularly high food prices, is a politically sensitive issue in India, where more than two-thirds of the population lives on less than $2 a day.