India’s central bank hiked interest rates for the second time in as many months on Wednesday, as Asia’s third-biggest economy is hit by runaway inflation following the Ukraine war.
The Reserve Bank of India raised its main repo rate by 50 basis points to 4.90 percent, a month after it launched an aggressive monetary tightening cycle with a surprise hike of 0.4 percentage point in May.
“The war in Europe is ongoing and we face new challenges every day,” Bank Governor Shakkanta Das said in a televised address, noting higher food and fuel prices.
He added that inflation is a global problem but emerging markets face “major challenges” with market turmoil following monetary policy changes in advanced economies.
India has bounced back strongly from the coronavirus pandemic, with one of the world’s fastest growth rates, but is now grappling with rising costs as commodity prices soar around the world.
Consumer inflation has consistently exceeded the central bank’s target range of two to six percent for the first four months of the year, hitting an eight-year high of 7.79 percent in April.
The Indian economy has seen sharp price hikes across the board, including food and fuel.
Last month the government banned wheat exports to curb prices after a heatwave hit local crop yields.
Officials also capped sugar exports to secure supplies and cut tariffs on fuel and cooking oils to curb consumer spending.
India imports more than 80 percent of its crude oil needs, with its dependency increasing as domestic production falls, and the country’s 1.4 billion people are being hit by rising fuel costs.
Prices have risen sharply since Russia’s invasion of Ukraine earlier this year, and economists estimate that a $10-per-barrel hike in Brent crude will add about 25 basis points to consumer inflation in India.
– ‘no brainer’ –
The governor had signaled the move at length in advance on Wednesday, describing a rate hike in June as “no-brainer” in a recent TV interview.
India’s 0.4 percent interest rate hike in May surprised markets, although economists supported the move as a necessary counterbalance to inflationary pressures.
Kotak Institutional Equities economist Suvodeep Rakshit said Wednesday’s rate hike and inflation forecasts were “in line with market expectations”.
Wednesday’s monetary policy resolution also signaled further tightening, with more focus on unwinding the accommodative stance taken during the pandemic.
The RBI maintained its growth forecast of 7.2 percent for the 2022-23 financial year, but raised its inflation forecast significantly to 6.7 percent from 5.7 percent last month.
The World Bank on Tuesday lowered its growth forecast for India in the current fiscal year to 7.5 percent from a previous forecast of 8.7 percent.
A strong post-pandemic consumption recovery will be offset by “headwinds from rising inflation, supply chain disruptions and geopolitical tensions,” according to the World Bank in its report.
Indian stocks became volatile following the announcement, with the benchmark Sensex index falling one percent before rebounding to trade 0.32 percent higher at midday.
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