India: The four good reasons that explain the hike in the key benchmark interest rates

- "The Reserve Bank of India has just carried out its fifth consecutive interest rate hike since March 2010, continuing the withdrawal of a significant part of the stimulus implemented during the financial crisis. This very gradual monetary policy tightening seems logical in an environment where inflation is relatively high and where prices of financial assets are rising sharply. Furthermore, the interest rate hike does not endanger the domestic financing of the fiscal deficit (which is declining markedly) at reasonable borrowing costs. A likely appreciation of the rupee will probably not adversely affect India’s price-competitiveness for exports, which has improved against India’s trading partners during 2010. If the current macroeconomic environment (i.e. high nominal GDP growth, high inflation, negative real interest rates, lowering budget deficit and rupee stability) persists, more gradual monetary tightening in the months to come will be very likely."

Natixis Special Report 183 20100916

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