India's bonds had their biggest plunge in seven months yesterday after Reddy unexpectedly raised short-term rates. It isn't additional rate hikes that traders fear -- it's that rapid growth will fuel inflation.
The Reserve Bank of India was right to raise its overnight borrowing rate to a three-year high of 5.5 percent from 5.25 percent. Its fourth increase in 15 months proved two things. One, Reddy isn't in the pocket of politicians hoping he'd stop boosting rates. Two, inflation is a bigger threat than many in the markets appreciate.
Investors need not panic. By raising its growth forecast for the fiscal year ending March 31 to 8 percent from 7.5 percent, the central bank effectively admitted its rate increases aren't working. Reddy remains on the case, though. In a region in which many central banks are holding borrowing costs too low, India is throwing down the gauntlet.
Reddy's balancing act is a particularly dicey one that makes the U.S. Federal Reserve's job seem like a breeze.