India’s central bank yesterday hiked rates for a second time, as Asia’s third-largest economy reels from galloping inflation due to the war in Ukraine.
The Reserve Bank of India (RBI) raised its key repo rate by 50 basis points to 4.9 percent, a month after launching an aggressive monetary tightening cycle with a surprise 0.4 percentage-point lift.
“The war in Europe is lingering and we are facing newer challenges each passing day,” RBI Governor Shaktikanta Das said in a televised address, pointing to higher food and fuel prices.
Photo: AFP
He said that inflation was a global problem, but emerging economies were facing “bigger challenges,” with market turbulence following monetary policy shifts in advanced economies.
India bounced back strongly from the COVID-19 pandemic with one of the world’s fastest growth rates, but is now grappling with rising costs as commodity prices skyrocket worldwide.
Consumer inflation has consistently overshot India’s 2 to 6 percent target range in the first four months of the year, hitting an eight-year high of 7.79 percent in April.
“From the policy withdrawal perspective, the RBI in the past two months has moved quite aggressively and swiftly,” Kotak Mahindra Bank senior economist Upasna Bhardwaj said in a note.
However, despite efforts to curb price pressures, inflation is likely to remain at about 7 percent for the foreseeable future, she said.
India’s economy has seen sharp price increases across the board, including food and fuel.
Last month, the government banned wheat exports to rein them in after a heat wave hit local crop yields.
Officials also capped sugar exports to safeguard supplies, and slashed duties on fuel and edible oils to buffer consumer spending. India imports more than 80 percent of its crude oil needs, with its dependence growing as domestic production falls, and the country’s 1.4 billion people have been hit with rising gasoline costs.
Prices have risen sharply since Russia’s invasion of Ukraine on Feb. 24, and economists estimate that a US$10 per barrel rise in Brent crude would increase consumer inflation in India by about 25 basis points.
The governor had extensively signaled yesterday’s move in advance, calling a 0.5 percent hike a “no brainer” in a television interview on May 23.
India’s 0.4 percent rate rise last month had caught markets by surprise, although economists supported the move as a necessary counterweight to inflationary pressures.
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