Increasing interest rates due to high inflation - WB

The World Bank's Financial Sector Quarterly Update report for the third quarter 2007 released last week said that the rupee came under tremendous pressure during the period and depreciated by 3% against the Sterling Pound, 4.5% against SDR, 1.8% against Dollar, 7.4% against Euro and 10% against Japanese Yen.

During the period the trade deficit reduced and was also strengthened through private remittances. The gross official reserves in July amounted to $ 2.7 billion (3.1 months of imports) and the BOP registered a surplus of $ 115 million in July.

Inflation escalated during the period and reflected an upward trend. In the third quarter of 2007, Point-to-Point Index increased from 13.0% in June to 17.3% in September while the Monthly Moving Average Index increased from 17.0% to 17.5% reflecting the past trend. The price indices reflected the full impact of the price adjustments in fuel, gas and flour. In addition, with the increasing exchange rates, there is cost push inflation as well.

During the third quarter of 2007, the increasing trend of the average prime lending rate continued and it further increased from 16.0% in June to 17.9% in September. The Central Bank policy remained unchanged during the period under review and the repo rate and reverse repo rates remained at 10.5% and 12% respectively.

The short-term Treasury Bill rates have increased and the one year rate ended at 17.31%.