India hikes interest rates again

Part of frantic effort to stop rupee’s plunge.

The Reserve Bank of India, the central bank, hiked two interest rates on July 16 to prop up the weakening rupee in a move that could also impede India’s economic recovery.

RBI increased both the marginal standing rate and the bank rate by a hefty two percentage points to 10.25% from 8.25%. It left unchanged at 7.25% its benchmark repurchase rate at which it lends to commercial banks against securities.

The central bank also plans to sell US$2 billion in government bonds that will remove cash from the economy and make funds scarcer. This monetary tightening signals a reversal of RBI’s loosening stance since the start of the year in which it cut rates three times to help stimulate growth.

The bank’s move followed other steps taken by authorities last week to curb speculative trading in the rupee, which after it hit a record low of 61.21 rupees to the dollar early last week.