The specter of inflation has put markets and economic policymakers on alert in Asia. China on Friday raised banks’ reserve requirement ratio (RRR) by 50 basis points to a record high of 19.5 percent, the fourth RRR hike in two months. Inflation is a deeply sensitive issue in China, as the leadership is aware that periods of social upheaval have traditionally been accompanied by high inflation. Analysts expect China to act aggressively to tamp down inflation by implementing another pair of interest rate and RRR hikes in the first quarter. China’s inflation grew by 5.1 percent in December, a 28-month high. China’s inflation target for 2011 is 4 percent, but several prominent economists have said that the country will overshoot this target and that rising wages will lead to high inflation for the next five to 10 years. Chinese markets are in wait-and-see mode and investors await the release of full-year economic statistics later in the month.

Rising inflation has also led to market jitters in Asia’s other rising giant. India’s Bombay Stock Exchange’s Sensitive Index (Sensex) on Friday fell 1.7 percent to 18,860.44 on fears that an interest rate hike is imminent. The Sensex has fallen 10 percent from a record high on Nov. 5, 2010. The index fell 4.2 percent this week alone. The index has also retreated by 8 percent this year, making it the worst-performing index in dollar terms among the world’s 10 largest equity markets, Bloomberg reported.

India’s food price inflation soared by 18.32 percent year on year in the week ended Dec. 25, 2010, leading many investors to fear that the Reserve Bank of India, the central bank, will raise interest rates before its regular economic review on Jan. 25. Prices for onions, a staple food for Indian households, have skyrocketed and the government has halted onion exports and import taxes on the vegetable. Onion prices have emerged as a foreign policy issue for India. The country’s neighbor and rival Pakistan has banned exports of onions to India, fearing shortages at home. India has retaliated by lowering cement sales to Pakistan. High onion prices have led to protests and political upheaval in the world’s most populous democracy in the past. Indira Gandhi in 1980 used high onion prices as a political issue to oust a socialist party from power.

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