India raises policy rate by 25 bps in first hike in nearly four years

MUMBAI: The Indian central bank raised its benchmark repo rate by 25 basis points to 5.5% on Wednesday, marking the first rise in nearly four years amid mounting inflation and strong economic growth.

India has joined major central banks in raising rates as higher oil prices triggered by the Iran war fuel inflation, squeeze purchasing power and weigh on currencies.

Weak monsoon rains linked to El Niño have compounded price pressures in Asia’s third-largest economy.

The six-member rate panel voted unanimously in favour of the rate hike.

The monetary policy stance was changed to “calibrated tightening” from “neutral”.

It is clear that the outlook for inflation is no longer benign, Governor Sanjay Malhotra said in his policy address.

Nearly 60% of economists in a Reuters poll expected a 25 bps increase in the repo rate.

Consumer inflation accelerated in August to 4.82% from a year earlier, above the Reserve Bank of India’s 4% medium-term target for a third consecutive month.

Higher prices of fuel and food are now rippling through the economy with nearly half of the consumer basket seeing inflation above 4%.

At the same time, economic growth remains strong, giving the central bank greater leeway to raise the cost of borrowing for consumers and businesses.

GDP growth for the April-June quarter stood at 7.8%, well above the central bank’s forecast of 7%.