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Friday, December 2, 2022

RBI raises leading interest rate by 50 basis points to combat inflation

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The Reserve Bank of India raised its policy rate by 50 basis points. The RBI hiked its key repurchase rate for the second time in two months to fight inflation.

The Reserve Bank of India increased its key interest rate by an aggressive 50 basis points to combat inflation, and experts predict further hikes.

The central bank boosted its main repurchase rate, known as the repo, for the second time in two months to battle inflation, which has been burning holes in consumers’ pockets and causing many to cut back on spending.

Retail inflation touched an eight-year high of 7.8 percent in April, fueled by increases in the prices of fuel, vegetables, and cooking oil, and the bank is concerned that wholesale prices, which are at a three-decade high of 15%, may feed through to consumers. Inflation is also being fueled by rising commodity costs and supply-chain bottlenecks caused by Russia’s invasion of Ukraine, as well as lockdowns caused by China’s Covid-zero policy.

“The Ukrainian conflict has resulted in globalization of inflation,” stated RBI Governor Shaktikanta Das.

The 50 basis point increase today “reflects inflation elbowing its way to the top of the RBI’s priority list,” according to Aurodeep Nandi, Nomura’s India economist.

Economists believe the bank has lagged behind its global rivals in raising rates in response to growing global inflation because it has been focused on accelerating economic recovery in the aftermath of the outbreak.

The bank’s rate-setting monetary policy committee raised the repurchase rate, or repo, from 4.40 percent to 4.90 percent. Economists predict that the rate will be nearly 6% by the conclusion of the fiscal year.

The bank increased its inflation prediction for the fiscal year ending March 2023 by a full percentage point to 6.7% from 5.7%, above the RBI’s top ceiling of 6%.

However, other analysts believe the bank’s inflation forecast is still too modest. Analysts predicted another 40 to 50 basis point hike at the bank’s next rate-setting meeting in August.

 Das added, “With no end in sight to the Russia-Ukraine situation and the upside risks to inflation, inflation expectations must be stabilized. Consumer borrowing would become more expensive as interest rates rise, and the real estate sector has expressed worry about the impact on property sales.”

A trek was unavoidable, but we’ve already entered the danger zone. In announcing the rate rise, the Monetary Policy Committee formally announced a “removal of accommodation,” or so-called “easy money,” when interest rates are maintained low to promote development, but stated that it would support growth.

The bank intends to maintain “inflation at the center of policymaking,” according to Rahul Bajoria, chief India economist at Barclays, who forecasts the main policy rate will reach 5.75 percent by December. The economy remained on track, according to Reserve Bank Governor Das, who maintained the bank’s full-year growth prediction of 7.2 percent.

“Despite the epidemic and the conflict,” he said, adding that the expected regular monsoon will improve agricultural output and rural consumption.

However, he noted, “negative spillovers from geopolitical tensions; higher international commodity prices; rising input costs; tightening global financial conditions; and the global economic crisis continue to weigh on the outlook.”

The bank’s rate cut came a day after the World Bank reduced India’s growth prediction for the current fiscal year to March 2023 to 7.5% from 8% for the second time. It had previously anticipated that India’s GDP will expand by 8.7 percent this year.

After contracting by 6.6% the previous year, India’s GDP increased by 8.7% in 2021-22, the quickest rate of any major country.

Financial markets had anticipated the rate hike after Das described a June raise as a “no-brainer” as inflation continued to rise.

On Wednesday, he assured that the bank will continue to be “proactive and determined in reducing the impact of the continuing geopolitical crises on our economy.”

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