India joins global rate-tightening wave with first hike in nearly 4 years

MUMBAI: The Indian central bank raised its benchmark repo rate by 25 basis points to 5.5 percent on Wednesday, marking the first rise in nearly four years amid mounting inflation and strong economic growth. The central bank also signalled further rate hikes by changing its stance from “neutral” to “calibrated tightening”, but Governor Sanjay Malhotra said the extent and timing of any more increases would be contingent on actual inflation and growth outcomes.

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. Nearly 60 percent of economists in a Reuters poll had expected a 25 bps increase in the repo rate. “The Indian economy has been strong, and economic momentum remains broad based,” Malhotra said, adding that the inflation outlook had worsened since the last policy meeting. There is some evidence of elevated inflation expectations and broadening of price pressures, Malhotra said. “It is clear that inflation and its outlook are not benign as they were last year.”

The RBI now expects inflation at 5.2 percent, a small increase over its earlier forecast of 5 percent. Core inflation is seen at 4.4 percent from 4.3 percent earlier. Analysts have been divided on how far the central bank will go in raising rates. “We expect another 50-75 basis point in rate hikes over the coming months,” said Sakshi Gupta, economist at HDFC Bank. “In the event that the West Asia conflict lingers and oil prices remain elevated, the inflation risk could increase further, necessitating a more aggressive tightening cycle,” Gupta said.

India’s benchmark 10-year bond yield was slightly higher at 7.2269 percent, while the rupee currency hovered around its previous close at 96.43 against the US dollar. The benchmark Nifty 50 Index was down 0.3 percent but recovered from day’s lows.