New Delhi June 8 2022: India’s central bank raised the key interest rate for a second straight month to rein in prices that have been running above its target band since the beginning of this year.
The Reserve Bank of India’s rate setting panel voted unanimously to raise the repurchase rate by 50 basis points to 4.90%. Of the 41 economists in a Bloomberg survey, 17 expected a 50 basis point hike, while the rest penciled in increases ranging from 25 basis points to 75 basis points.
“Inflation has steeply increased much beyond the upper tolerance level,” said RBI Governor Shaktikanta Das in an online briefing. “A large part of the rise in inflation is primarily attributed to a series of supply shocks which can be linked to the war,” he said.
The central bank also raised its inflation forecast for the year ending March to 6.7% from 5.7% seen previously. The RBI targets inflation between 2%-6%. With inflation set to hover above the tolerance level for three quarters, the central bank withdrew its intention of “staying accommodative.”
Under Indian laws, if inflation stays above 6% for three straight quarters, the central bank will have to write a letter to the government laying out the reasons for failing to meet its mandate as well as suggest remedial measures to bring prices under control.
Indian bonds gained, with the yield on benchmark 10-year bond falling by two basis points to 7.49%, while the rupee was little changed. Stocks edged lower.
The decision comes as central banks worldwide grapple with worse-than-anticipated inflation driven by supply chain disruptions, virus lockdowns and the war in Ukraine. India joins more than 50 monetary authorities, including the Federal Reserve, to have raised rates by atleast a half-point in one move this year.
Wednesday’s move follows coordinated fiscal and monetary actions by Indian policymakers, including a surprise off-cycle hike in May and a $26 billion package to ease price pressures. India’s CPI accelerated to the highest in eight years in April, while producer price inflation hit a three-decade high last month.