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India joined Brazil, China and Russia in raising borrowing costs to combat inflation, adding to the risk of a slowdown in the world's fastest-growing economies.

The Reserve Bank of India yesterday unexpectedly increased the repurchase rate to 8 percent from 7.75 percent, joining its fellow members of what Goldman Sachs Group Inc. terms the “BRIC'' nations in taking steps to cool their economies within the past week. Brazil, where consumer prices have surged to a three-year high, and Russia both raised rates, while China ordered lenders to set aside more reserves.

The crackdown suggests that the four nations, which the International Monetary Fund says accounted for almost half of the global expansion last year, can't be counted on to provide a safe haven for investors battered by the doubling of crude-oil prices over the past 12 months, turmoil in the credit markets and the U.S. economic slowdown.

“The BRICS are better placed to withstand a slowdown, but that doesn't mean they won't feel it,'' said Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina. “Everyone is going to.''

Net private investment in developing countries surged by $269 billion last year to a record $1.03 trillion, with the bulk of the money going to the BRIC countries, according to the World Bank. It forecasts those investment flows will drop to about $800 billion by next year.

World Bank Forecasts

Global economic growth will probably slow to 2.7 percent this year from 3.7 percent in 2007, checked by spiraling food and energy prices and tighter credit, the World Bank said in its Global Development Finance report on June 10.

“It doesn't bode well for global growth if central banks in emerging markets have to be raising rates at a time when the U.S. and European economies are slowing,'' said Martin Schulz, manager of the Allegiant International Equity Fund in Cleveland, which manages $450 million.

China's expansion is expected to cool to 9.4 percent from 11.9 percent and Brazil's to 4.6 percent from 5.4 percent. Russia's economy may grow 7.1 percent from 8.1 percent in 2007, while India's may ease to 7 percent this year, the report said.

India may see a “a tightening bias in monetary policy in the near term,'' said Tushar Poddar, an economist at Goldman in Mumbai.

Stocks Decline

Indian shares trading in the U.S. fell, sending the Bank of New York India ADR Index to a two-month low. ICICI Bank Ltd., Tata Motors Ltd. and Satyam Computer Services Ltd. dropped after the decision, pushing the index down 2.8 percent to 915.04.

“Yes, there is a downside to growth, but you can't make an omelet without breaking an egg,'' said Suman Kumar Bery, the New Delhi-based director general of the National Council of Applied Economic Research cashadvance.

China's central bank on June 7 told lenders to set aside more of their deposits as reserves to stop cash in the financial system from stoking price gains. Brazil's central bank June 4 raised the benchmark lending rate a half percentage point, while Russia raised interest rates by 25 basis points on June 9.

Goldman's Poddar expects India's repurchase rate to increase by a further 25 basis points in the next policy meeting on July 29 and another 50 basis point increase in the cash reserve ratio in the remainder of 2008. A basis point is 0.01 percentage point.

The yield on the benchmark 10-year government bonds reached a two-year high of 8.31 percent on June 9. The notes extended losses for a sixth week on concern the central bank hadn't done enough to stem inflation and check a slide in the local currency, which was also adding to price gains.

Reddy's Campaign

Reserve Bank of India Governor Yaga Venugopal Reddy has raised the repurchase rate eight times in the past 2 1/2 years. He's also lifted the cash reserve ratio — the proportion of deposits lenders must set aside — seven times since December 2006 to slow money supply and cool inflation.

“Inflation in India will probably go a bit higher,'' said John Praveen, chief investment strategist at Prudential International Investment Advisers LLC, a Newark, New Jersey-based unit of Prudential Financial Inc. “The RBI has tried to pre-empt that, but we'll see some more elevated numbers on inflation.''

Lehman Brothers Holdings Inc., Standard Chartered Bank and ICICI Securities Ltd. expect India's inflation rate to rise to 9.5 percent, the highest since 1995. Inflation is currently at 8.24 percent, near a four-year high. The changes in fuel prices announced on June 4 will be reflected in price data due for release on June 20.

Federal Reserve Chairman Ben S. Bernanke said June 9 he'll “strongly resist'' any surge in inflation expectations, while European Central Bank President Jean-Claude Trichet reiterated he may raise rates as soon as next month.

“About a month ago, the central banks were struggling with the idea of prioritizing growth versus inflation,'' said Shuchita Mehta, a Mumbai-based economist at Standard Chartered. “Given the recent surge in global oil prices, fighting inflation has become a clear priority now with central banks around the world.''

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Filed under: economics by Finance Boss