The Indian central bank yesterday completed a hat-trick of half-point interest-rate hikes to anchor inflation expectations and prevent second-round effects from damping demand in the economy.
The benchmark repurchase rate was raised by 50 basis points to 5.90 percent, Reserve Bank of India (RBI) Governor Shaktikanta Das said after the six-member monetary policy committee’s 5-1 decision.
The move was expected by 34 of 46 economists in a Bloomberg survey, with 11 calling for 35 basis points and one for a quarter-point increment.
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“If high inflation is allowed to linger, it invariably triggers second-order effects,” Das said in a virtual briefing as he outlined the rate panel’s rationale for the large hike to tame above-target inflation, while trimming the economic growth view for the financial year ending in March next year to 7 percent from 7.2 percent previously.
The committee “must remain alert and nimble,” he said.
The decision reinforces the governor’s “whatever it takes” approach to fight inflation, as exceptional dollar strength on the back of a hawkish US Federal Reserve poses price risks to a nation that is reliant on imports.
The cumulative 190 basis points of hikes — all half-point moves barring one 40-basis-point rise in May — would help cut losses for the rupee, which touched a record low of 81.95 against the greenback in the past week.
The currency yesterday advanced 0.3 percent to 81.5950.
Benchmark 10-year bond yields traded little changed after climbing 6 basis points to 7.40 percent earlier, while stocks advanced.
“RBI appears to have delivered a status quo policy,” Rahul Bajoria, an economist with Barclays Bank PLC said, referring to the Indian central bank’s previous decision that involved an identical move. “We think data dependency will rise going forward as RBI stares at a wider trade off between growth and inflation.”
The Reserve Bank of India retained the 6.7 percent inflation forecast for this fiscal year. It now expects oil prices at US$100 per barrel, from US$105 it had assumed in its previous policy in August.
Das said that the inflation trajectory remains clouded with geopolitical uncertainty, but the correction in crude oil might ease cost pressures.
Oil prices have been on a steady decline, falling below US$80 a barrel from the peaks seen earlier, but erratic monsoon rains in several parts of the country might offset the benefit from the softening commodity prices.
India’s consumer prices rose to 7 percent in August, well above the central bank’s 2 to 6 percent target band.
Policy rate is not the only tool at the central bank’s disposal. It has depleted nearly US$100 billion in foreign exchange reserves in the past year, mostly to mount a staunch defense of the rupee to check imported inflation.
“The RBI intervenes to curb exchange rate volatility,” Das said. “The adequacy of forex reserves is always kept in mind and the umbrella continues to remain strong.”
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