India’s central bank raises interest rates for the second month in a row and takes “accommodative” out of its stance.
MUMBAI (Reuters) -As most people expected, the Reserve Bank of India raised its key interest rate by 50 basis points on Wednesday. This was the second increase in as many months, and it was done to try to cool Asia’s third-largest economy’s high inflation.
The central bank also got rid of a phrase that had been used for a long time: “future policy will remain “accommodative.” This makes it more likely that there will be more rate hikes and other tightening in the coming months as fighting inflation becomes the main goal.
RBI Governor Shaktikanta Das said after the policy decision, “The upside risks to inflation that were talked about at the last policy meeting have come true sooner than expected.”
The monetary policy committee (MPC) increased the key lending rate, also known as the repo rate, by 50 basis points (bps) to 4.90 percent.Both the Standing Deposit Facility rate and the Marginal Standing Facility rate were raised by the same amount, bringing them to 4.65% and 5.155%, respectively.
Das had said before that moving on June 8 was “obvious.” Analysts polled by Reuters, however, had different ideas about how much the Fed would raise rates. Their predictions ranged from 25 to 75 basis points (bps).
The increase on Wednesday comes after a 40-bps rise at an unplanned meeting in early May, which started the central bank’s tightening cycle. Economists think this cycle will be short.
Shilan Shah, a senior India economist at Capital Economics, said, “The more hawkish tone on inflation suggests that the MPC will continue to tighten policy in the coming months, perhaps with another 50bp hike at the next meeting in August.”
INTENSIFYING PRICE PRESSURES
Das said it is likely that inflation will stay above the RBI’s upper tolerance band for the first three quarters of the new financial year, which began on April 1.
The MPC also decided to keep focusing on the withdrawal of accommodation to make sure that inflation stays in the target range in the future and to support growth.“
Retail inflation jumped to 7.79% in April compared to the same month last year. This is the fourth month in a row that inflation has been above the RBI’s tolerance range of 2% to 6%, and this is likely to continue as the prices of crude oil, food, and other goods rise around the world.
Price hikes have hurt consumer spending and made the near-term outlook for India’s economic growth worse. In the first three months of 2022, economic growth was at its slowest in a year.
The RBI raised its inflation forecast for 2022/23 from 5.7 percent to 6.7 percent while maintaining its growth forecast at 7.2 percent.
Since March 2020, when the COVID-19 crisis hit, the central bank has cut the repo rate by a total of 115 bps.
After the policy decision, India’s 10-year benchmark bond yield went from a high of 7.56 percent to a low of 7.43 percent, and the rupee stayed the same at 77.69 per dollar.
Aditi Nayar, chief economist at rating agency ICRA, said that the comment about the government’s borrowing programme ending in an orderly way had a cooling effect on the 10-year G-sec yield.
Both the NSE share index and the BSE share index in India made up losses to trade up 0.2%. (BO)
“We thought there would be a 50-bps increase in the cash reserve ratio, but that didn’t happen,” said Vivek Kumar, an economist at the research firm QuantEco.
“But we would still expect some kind of liquidity action in line with the idea that the overall surplus should be brought down. This can happen through CRR or by the RBI making more FX interventions (selling dollars), “he added.
