India's inflation rate rises to 7 per cent, despite aggressive central bank interest rate moves

MUMBAI, India – India’s stubbornly high inflation rose to 7 per cent in October, the highest level in eight months despite efforts by the central bank to rein in prices by hiking interest rates.

Government figures released Thursday showed that prices for food were up 18.2 per cent, with vegetables leaping by 78.4 per cent. Fuel prices were also sharply up in October, rising 10.3 per cent.

Higher prices for food and fuel hit the hundreds of millions of poor Indians living on $2 per day particularly hard because they spend roughly half of their income on the staple items.

The new chief of the Reserve Bank of India, Raghuram Rajan, has made battling inflation one of his top priorities since taking office two months ago, hiking the key interest rate twice since September to its current 7.75 per cent.

In addition to high inflation, India is also suffering its slowest economic growth in a decade. The economy expanded 4.4 per cent in the April-June quarter, far below the 8 per cent rate the country averaged a few years ago.

Some business leaders have urged the central bank to cut interest rates to encourage businesses to borrow and invest and consumers to spend.

Rajan has argued, however, that unchecked inflation will do greater damage to the economy in the long run since consumer will have less money to spend on manufactured goods and other items. He has also made clear he thinks the government should do more to foster investment by easing regulations and reviving stalled infrastructure projects.

It’s unclear, though, whether the interest rate hikes will be able to tame food inflation. Some analysts say Indian food prices are largely driven by the country’s yearly monsoon and an inefficient distribution system that results in 30 per cent of produce spoiling before reaching markets.