India’s Central Bank Raises Rates, Says Inflation Battle Not Over

On Wednesday, the Indian central bank raised its benchmark interest rates once more by 35 basis points, which saw it reach 3.25%.

This is the fifth consecutive increase by the central bank and it has pushed up the interest rate to the highest it has been in more than 3 years.

The Reserve Bank of India (RBI) also said that it would not pull back from its fight against inflation.

Inflation still high

Even though there have been indications of moderation in price pressures, Shaktikanta Das, the Governor of the Reserve Bank of India (RBI), said that the primary concern was that inflation could remain elevated and pervasive.

This only reinforced market views that there could be more hikes in the interest rate from the central bank in the coming months.

There are three members of the Indian central bank and three external members that make up the Monetary Policy Committee (MPC).

They increased the lending rate in the country to 6.25%, which is the highest it has been since April 2019. Out of the six members, five were in favor of the hike.

Most analysts had also predicted a smaller hike of 35 basis points increase, as opposed to the 50 basis points increase made the last three times.

Inflation has remained on the upper side of the RBI’s target of 2% to 6% all year, which had prompted analysts to claim that the central bank would not stop hiking rates so soon.

The challenge

In October, the annual inflation in India dropped to 6.77%, which is the lowest in three months, thanks to a higher base effect and a slower increase in food prices.

This had strengthened the possibility of smaller interest rate hikes by the RBI moving forward. According to Das, they might have put the worst of inflation behind them, but they could not become complacent as yet.

When announcing the decision of the MPC, Das asserted that more action was needed for anchoring inflation expectations and breaking the persistence of inflation.

He said that their priority was to bring down inflation and they would not put an end to their efforts to do so.

The deputy governor of the RBI, Michael Patra, who is in charge of the monetary policy, said that while the rate hike was smaller, they were keeping an eye on the effects of inflation.

More hawkish

Investors believe that the next meeting will see another interest rate hike from the central bank in this cycle.

Market analysts said that they had not expected the statement to be this hawkish and it is clear that the central bank is not planning on ending its rate hike cycle as yet.

Most of the market watchers are also in agreement with this view. Economists said that they expected the MPC to remain watchful and there could be another hike of 25 basis points before they stop.

The MPC also did not shift its stance of removing high quantities of cash from the banking system. But, they made adjustments to the GDP growth for the 2022/2023 financial year.

They had been 7% earlier but were now lowered to 6.8%, but the forecast for retail inflation remained steady at 6.7%.

Das said that the growth in the country had remained resilient in the face of pressures.