India’s central bank raises interest rate to tame inflation

Reserve Bank of India raises its key interest rate to 4.4 per cent from four per cent to try to contain fast-rising inflation



The RBI has set a medium-term target for CPI inflation of four per cent within a band of plus or minus two per cent. — Reuters file photo
The RBI has set a medium-term target for CPI inflation of four per cent within a band of plus or minus two per cent. — Reuters file photo

By AP

Published: Wed 4 May 2022, 3:15 PM

Last updated: Wed 4 May 2022, 4:37 PM

The Reserve Bank of India on Wednesday raised its key interest rate to 4.4 per cent from four per cent in a surprise move aimed at taming the fast-rising inflation Asia’s third-biggest economy faces in the wake of the Ukraine war.

The critical move by the apex bank will help mop up excess liquidity and bring down the elevated inflation which is already close to 7.0 per cent.

The hike in repo rate — the key policy rate of RBI or the rate at which it lends to banks — will lead to rising cost of funds for banks. This will prompt banks and other non-banking financial companies to raise the lending and deposit rate in the coming month. The RBI last hiked the repo rate by 25 basis points to 6.50 per cent in August 2018.

Analysts said the immediate fallout of the RBI move is a rise in equated monthly installments (EMIs) on home, vehicle and other personal and corporate loans. Deposit rates are also set to rise after the repo rate hike for the first time in nearly four years.

RBI Governor Shaktikanta Das said after an unscheduled meeting of the bank’s monetary policy committee that the central bank would maintain an “accommodative” stance to help support the economy while keeping inflation in check.

The announcement came hours before the US Federal Reserve was expected to undertake its largest rate hike in two decades in response to accelerating inflation in the world’s biggest economy. This could spark capital outflows from emerging markets such as India.

“We, in the RBI, remain steadfast in our commitment to contain inflation and support growth. Inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth. The biggest contribution to overall macroeconomic and financial stability as well as sustainable growth would come from our effort to maintain price stability,” the RBI Governor said.

Analysts said the move came as a surprise as the RBI’s next meeting to set interest rates wasn’t scheduled until June 8.

In the first scheduled monetary policy announcement of the current financial year on April 8, the RBI had decided to keep the key policy rates unchanged for the 11th time in a row.

But in its first clear signal of a future rate hike, the RBI governor had said the bank was “focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.”

“Looking ahead, further rate hikes look nailed on. After all, the rise in headline inflation has further to run,” Shilan Shah of Capital Economics said in a report.

In 2020, the RBI cut its benchmark rate from 5.1 per cent to four per cent, the lowest level since March 2010, to ease financing woes during the pandemic.

India’s consumer price index surged to seven per cent in March from 6.1 per cent in February, largely reflecting higher costs for imports of coal, oil and food. Das mentioned global shortages of wheat and edible oil as factors. Consumer inflation has consistently overshot the RBI’s two-to-six per cent target in the first three months of the year, hitting a 17-month high of 6.95 percent in March.

The RBI has set a medium-term target for CPI inflation of four per cent within a band of plus or minus two per cent, Das said.

He expressed concern that the deteriorating global situation amid the war in Ukraine was causing a “tectonic shift” in commodity markets, trade and financial linkages.

Following the RBI move, the Indian stock markets’ key indices, Sensex and Nifty, slumped by more than two per cent.

The 30 stock S&P BSE Sensex slumped 1306.96 points or 2.29 per cent to 55,669.03 points against its previous session’s close at 56,975.99 points.

Earlier, the Sensex started the day on a positive note at 57,124.91 points and rose to a high of 57,184.21 points in the early morning trade. However, the markets turned negative in the morning trade itself. The selling pressure intensified after the RBI announcement of repo rate hike.

The RBI had also lowered its growth forecast of the economy to 7.2 per cent for the 2022-23 financial year, from 7.8 per cent predicted earlier.

It had raised its inflation forecast to 5.7 per cent for the fiscal year that started April 1, up from its 4.5 per cent in February.

— issacjohn@khaleejtimes.com


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