The Reserve Bank of India yesterday hiked its key interest rate by 25 basis points in a surprise move aimed at taming inflation, which remains above the bank’s comfort level.
After a meeting in the country’s financial capital, Mumbai, the central bank said the benchmark repo rate at which it lends to commercial banks would rise to 8 percent.
Several economists had predicted that the rates would be kept on hold after the widely watched Wholesale Price Inflation index fell to 6.16 percent last month from a year earlier, a sharp decline from the 7.52 percent recorded the previous month.
However, a statement from Reserve Bank of India Governor Raghuram Rajan said that there is still pressure on inflation due to economic factors such as the rising prices of services.
“It is critical to address these risks to the inflation outlook resolutely in order to stabilize and anchor inflation expectations, even while recognizing the economy is weak and substantial fiscal tightening is likely in Q4 [this month to March],” Rajan said.
While business leaders have been clamoring for a rates cut to boost growth and spur investment, such a reduction would also pile pressure on the rupee, which sank on Monday to its weakest level in over two months.
The bank under Rajan raised rates in September and October last year in a determined bid to fight inflation, but it then surprised markets by holding rates last month even after inflation accelerated to a 14-month peak.
Consumer price inflation is expected to exceed 9 percent in the three months ending on March 31, and range between 7.5 and 8.5 percent in the same period next year, the central bank said in a separate review yesterday.
An increase in the policy rate “will set the economy securely on the recommended disinflationary path,” it said in a statement.
If inflation slows, the economy could grow between 5 and 6 percent in the next fiscal year ending next March, the statement said, while forecasting that Asia’s third-biggest economy would expand at “a little below” 5 percent in the period through March 31.
“Core inflation is far too high and a decline in the near term is not on the cards,” said Leif Eskesen, chief economist for India and Southeast Asia at HSBC Holdings PLC in Singapore. “If the recently proposed change to the monetary policy framework is introduced, that could also help pave the way for further rate hikes.”
India’s rupee rose 0.3 percent to 62.9025 per US dollar as of 11:32am in Mumbai yesterday.
The currency declined about 14 percent in the past year, adding to price pressures by raising the cost of imports such as crude oil.