India Raises Reserve Ratio in Bid to Curb Inflation

India's central bank intensified its battle against rising prices on a day when the nation's premier said sustaining robust growth with low inflation is a challenge. In a country where a vast number of people live in poverty, high food prices hit hard. Inflation is expected to be a key electoral issue when the government heads for a general election that must be held within the next 12 months. In another effort to stem inflation, the Reserve Bank of India raised the amount of capital banks must keep with the central bank, a move intended to restrict bank lending. Some economists were surprised and had expected no action. This was the fourth time in a year that the bank has hiked the cash-reserve ratio, most recently earlier in April. Banks must now set aside 8.25% of their cash from May 24. The central bank left interest rates unchanged. By draining liquidity with the cash-reserve increase, India's central bank is tracking China and Singapore in tightening monetary policy as surging prices for metal and food around the world have seen inflation soar. In the week ended April 12, wholesale price inflation stood at an annual rate of 7.33%. The central bank said it wants to bring inflation down to around 5.5% in the year ending March 31, 2009, "with a preference for bringing it close to 5% as soon as possible." But economists don't expect the bank's moves to stem inflation significantly anytime soon. Some cautioned that the bank may opt for more inflation-fighting measures, and that could extend a period of slower growth. Currently, HSBC predicts gross domestic product will grow 7.8% in the year ending March 31, 2010. In the year ending March 31, 2009, it forecasts growth averaging 7%. The central bank said recently it expected GDP growth of 8% to 8.5% in the year ending March 31, 2009. In the year ended March 31, the government estimates GDP grew 8.7%. Singh said he thought government's recent moves to fight inflation, such as banning exports of nonbasmati rice, would help bring down prices.