India is the world’s largest democracy in terms of population. It is home to almost 1.9 billion souls, making it a very tempting developing market for the rest of the world. The Reserve Bank of India has stated that controlling inflation is its top priority. With many of India’s population on the wrong side of the poverty line, rising prices can be an incendiary problem. "Actual inflation so far has been even higher than expected. The recent increase in domestic administered fuel prices and the minimum support price for certain food items will also keep inflation under pressure," the Reserve Bank said in a statement accompanying the interest rate move.
The current rate of inflation, for June, came in at 9.44%. Factory output grew by 5.6% in May, but this was lower than many analysts had predicted. Some see this as evidence of a floundering economic recovery in the developed word as near universal worries over sovereign debt prevail, choking of demand for imports from nations such as India.
The Reserve Bank of India has increased its interest rates to 8%, a 0.5% rise over the previous level and a move which was stronger than many India watchers had expected. The increase was the eleventh since March 2010. The Bank has acknowledged that there are some signs that growth within some sectors of the Indian economy is moderating, but it does not believe that a general slowdown is underway. The risk of increasing interest rates is that it may choke of growth by making expansion more expensive. "Considering the overall growth-inflation scenario, we determined that it is necessary to persevere with the anti-inflationary stance," a spokesman for the bank said.