India's Central bank has raised interest rates in a bid to battle high inflation. The economy is growing at a brisk pace, but rising prices remain a key concern.
The latest interest rate hikes announced by the Central Bank are higher than expected. The rate at which it lends to banks is up by a quarter percentage point to six per cent, while the rate at which it borrows from banks has been raised by half a percentage point to five per cent.
A statement by the Central Bank said inflation remains the dominant concern.
India's Finance Minister, Pranab Mukherjee supports the measure. He says, "I think it is in the right direction… Still the inflationary pressure is there in the system."
It is the fifth time this year that interest rates have been raised. Interest rates began rising as the government started winding down stimulus measures put in place in 2008 to cope with the global financial slowdown. At that time interest rates had been slashed to encourage more spending by consumers.
Now India's economy is growing briskly once again. But at the same time, prices have been spiraling. Even though inflation has dipped marginally in recent weeks, it is still around eight and a half percent.
The rising prices are a huge worry for the government because they adversely affect poor people, who make up nearly forty per cent of the billion plus population. Opposition parties have accused it of not doing enough to rein in prices.
The government hopes that raising interest rates will help bring down inflation.
The government is also banking on ample monsoon rains this year to boost crop yields, and bring down the prices of food, which hit the poor particularly hard.
The government's chief economic policy, Kaushik Basu says he expects inflation to taper off by March next year.
"But we were expecting it to be distinctly lower by the end of this fiscal year and I stay by that," Basu said.
India's economy is expected to grow by nearly nine per cent this year – the world's second fastest-growing major economy after China.