The latest hike, the fifth in a row, follows a softening of India’s October retail inflation rate to 6.77% on the year from the five-month high of 7.41% recorded for September. But for 10 straight months, the rate has remained above the upper tolerance level of the RBI’s target band of 2% to 6%.
Ahead of the bank’s three-day Monetary Policy Committee meeting, which started Monday, a majority of 52 economists polled by Reuters had predicted a 35-basis-point increase, a smaller jump than recent hikes.
RBI gov Shaktikanta Das said in a televised statement that five out of six committee members had voted for the rate increase, which takes immediate effect.
Even as inflation showed signs of easing, Das stressed that the battle “is not over”, pointing out that “pressure points from high and sticky core inflation and exposure of food inflation to international factors and weather-related events do remain”.
The policy committee was of the view that “further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second-round effects,” he said.
The RBI started increasing the repo rate – the rate at which it lends money to commercial banks – in May after leaving it unchanged for two years at 4%. Before Wednesday’s decision, the RBI had hiked the key lending rate by a total of 1.9 percentage points this year on four separate occasions, joining many central banks in fighting soaring inflation in the wake of Russia’s invasion of Ukraine.
After a hike of 40 basis points in an off-cycle meeting in May, the RBI increased the rate by 50 basis points in each of its next three meetings up to the end of September.
The RBI’s rate-setting panel on Wednesday also decided by a majority of four out of six votes to remain focused on “withdrawal of accommodation” to ensure that inflation remains within the target band going forward while supporting growth, Das added. “Our actions will be nimble and in the best interest of the economy” he said.
The latest hike comes a week after the release of gross domestic product data for India’s second fiscal quarter, which showed that growth slowed to 6.3% year-on-year in July-September after a double-digit jump of 13.5% in the previous three months.
The September quarter GDP growth “was in line with the RBI’s projection of 6.3%, and amid still sticky core inflation, it should nudge the RBI to continue on its normalisation path, but at a slower pace versus the front-loaded 50 basis point hikes so far,” Japanese brokerage Nomura said in a note last week.
Das said the bank was lowering its GDP projection for the full financial year to 6.8%, down from 7% in September. Still, he emphasised, “Even after this revision in our growth projection … India will still be among the fastest-growing major economies in the world.”
The central banker said that in an interconnected world, India “cannot remain entirely decoupled from adverse spillovers from the global slowdown and its negative impact on our net exports and overall economic activity”.
“The biggest risks to the outlook continue to be the headwinds emanating from protracted geopolitical tensions, the global slowdown and tightening of global financial conditions.”
The World Bank’s India Development Update, issued on Tuesday, took a similar but slightly sunnier view, upgrading its growth forecast for the fiscal year to 6.9% from 6.5%.
Like most emerging market economies, the World Bank report said, India has been affected by challenging global developments. At the same time, it added that the South Asian nation is better placed to deal with the headwinds. “India’s economy is relatively more insulated from global spillovers than other emerging markets. India is less exposed to international trade flows and relies on its large domestic market.”
On India’s average retail inflation in the ongoing financial year, the World Bank report said that it is expected to be 7.1%. However, the RBI on Wednesday retained its full-year inflation forecast at 6.7%.