INDIA’S central bank completed a hat-trick of half-point interest-rate hikes Friday 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%, Reserve Bank of India Governor Shaktikanta Das said after the six-member monetary policy committee’s 5-1 decision. The move was seen by 34 of 46 economists in a Bloomberg survey, with 11 calling for 35 basis points and one for a quarter-point increment.
“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 March to 7% from 7.2% previously. The MPC “must remain alert and nimble.”
The decision reinforces the governor’s “whatever it takes” approach to fight inflation, as exceptional dollar strength on the back of a hawkish Federal Reserve poses price risks to a nation reliant on imports. The cumulative 190 basis points of hikes — all half-point moves barring one 40-basis-point rise in May — will help cut losses for the rupee, which touched a record low of 81.95 against the greenback in the past week.
The currency advanced 0.3% to 81.5950. Benchmark 10-year bond yields traded little changed after climbing 6 basis points to 7.40% 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 bank’s past 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 RBI retained the 6.7% inflation forecast for the year ending March. It now expects oil prices at $100 per barrel, from $105 it had assumed in its last policy in August.
Das said the inflation trajectory remains clouded with geopolitical uncertainty, but the correction in crude oil may ease cost pressures.
Oil prices have been on a steady decline, falling below $80 a barrel from the peaks seen earlier but erratic monsoon rains in several parts of the country may offset the benefit from the softening commodity prices. India’s consumer prices rose to 7% in August, well above the central bank’s 2%-6% target band.
Policy rate isn’t the only tool at the RBI’s disposal. The central bank has depleted nearly $100 billion in foreign exchange reserves this 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.”
Bonds pared early losses because “the governor’s commentary was not very hawkish and took a balanced view on inflation,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership. – BLOOMBERG
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