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The Canadian Press - ONLINE EDITION

India's central bank raises key interest rate, lowers growth forecast

NEW DELHI - India's central bank raised its key interest rate for the third time in four months Tuesday and its governor said combating stubbornly high inflation is the top priority despite an "increasingly worrisome" slowdown in economic growth.

The announcement of a quarter percentage point increase in the lending rate Tuesday to 8 per cent sent Indian stocks lower, adding to losses accumulated during a sell-off in emerging markets that began late last week.

Investors had hoped that the Reserve Bank of India would leave the rate at which it lends to banks unchanged after a dip in December inflation to 6.2 per cent and a decline in the current account deficit.

Reserve Bank chief Raghuram Rajan said Tuesday that inflation is a far greater short-term risk to the economy than slower growth because it hurts the poor the most and discourages spending.

"The so-called trade-off between inflation and growth is a false trade-off in the long run," Rajan said. "It is possible to bring inflation under control without a substantial sacrifice of short-term growth, provided we do what is necessary and are patient."

At the same time, the central bank cut its economic growth forecast for the fiscal year ending March to 4.6 per cent from 5 per cent.

Still, he predicted the economy could recover to 5-6 per cent growth in the year ending March 2015 provided the global economy improves, inflation eases and investment projects worth more than $63.5 billion move ahead.

The Sensex index was down 0.3 per cent to 20,644.53 on news of the rate increase.

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