India’s RBI raises interest rates in surprise move as inflation bites

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The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) raised policy rates by 40 basis points (bps) on Wednesday — for the first times in two years — as a sharp rise in inflation to a 18-month high due to soaring food and fuel prices ended the central bank’s gradual normalisation.

The RBI also increased cash reserve ratio (CRR) requirement by 50 basis points (bps) to 4.50% ahead of its scheduled meeting in June. A sharp rise in inflation outlook for this fiscal, along with increasing pace of monetary policy tightening by major global central banks have significantly reduced the policy space the MPC had. 

This is the first hike since the Covid-19 pandemic began, and restores the repo rate to the April 2020 level. However, it remains below the pre-pandemic rate of 5.15% in February 2020.

“Inflation-sensitive items relevant to India such as edible oils are facing shortages due to the conflict in Europe and export bans by key producers. The jump in fertiliser prices and other input costs has a direct impact on food prices in India,” RBI Governor Shaktikanta Das said in an online media briefing.

The RBI believes all this coupled with lockdowns in China is likely to “accentuate global supply chain bottlenecks while depressing growth”, and pose further upside risks to India’s inflation trajectory.

Das said food inflation was expected to remain high as “spillovers from global wheat shortages are impacting domestic prices, even though domestic supply remains comfortable”.

The RBI’s decision came ahead of the U.S. Federal Reserve’s meeting later on Wednesday and expectations that interest rates in the world’s largest economy will be raised by at least half a percentage point.

“India’s vulnerability has also deteriorated on account of account of high crude oil prices as it will adversely impact major macros, including GDP growth, inflation, the current account deficit, and rupee, and possibly, the fiscal deficit. Given these factors, we expect the RBI to hike the repo rate by another 75-100 bps this fiscal. The hikes are likely to be front-loaded, given that inflationary pressures remain significantly high at present,” ratings agency CRISIL said in a note.

“We do foresee an additional 35-60 bps of rate hikes in the remainder of H1 FY2023,” Aditi Nayar, Chief Economist, ICRA Limited, said in a statement.

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