India hikes rates as outlook ‘bleak’
CENTRAL BANK: WORLD TO FACE THIRD MAJOR SHOCK
INDIA’S central bank said a “bleak” global outlook warranted its fourth rate hike in five months last Friday (30), as Asia’s third-largest economy struggles under the weight of chronically high inflation and a falling currency.
The Reserve Bank of India (RBI) raised its key lending rate by 50 basis points to 5.90 per cent, marking a total increase of nearly two percentage points since it kicked off a monetary tightening cycle in May.
The country bounced back strongly from the coronavirus pandemic, but is now grappling with the same headwinds buffeting the global economy. “The global economic outlook continues to be bleak,” RBI governor Shaktikanta Das said in a televised address.
Aggressive rate hikes and ominous commentary from other leading central banks was posing a “third major shock” to the world economy on the back of the pandemic and the Ukraine war, he added.
“Recent rate hikes and forward guidance about further big rate hikes have caused tightening of financial conditions, extreme volatility and risk aversion,” Das said.
The rise matched market expectations and the RBI was unlikely to pursue a monetary tightening that was “too restrictive”, Emkay Global Financial Services lead economist Madhavi Arora said in a note. “However, the extent of global disruption will remain key to the RBI’s reaction ahead,” she added.
Consumer inflation has consistently overshot the central bank’s 2.0-6.0 per cent target range this year.
Most recent data showed inflation rose to seven per cent in August, driven largely by food prices.
The RBI retained its inflation forecast for 2022-23 at 6.7 per cent, projecting a fall to five per cent in the June quarter. Its economic growth forecast for the current 2022-23 financial year was revised down to seven per cent, from the 7.2 per cent predicted earlier.
Rising global energy prices blew out India’s current account deficit to $23.9 billion in the June quarter, nearly double the figure from the first three months of the year and the highest since 2013.
India imports more than 80 per cent of its crude oil needs and rising petrol costs have driven spikes in consumer prices for the country’s 1.4 billion people. The Indian rupee has plunged some 10 per cent this year and hit a record low of 81.95 against the US dollar earlier in the week as the greenback rallies on risk-averse market sentiment.
India’s currency has proven more resilient than its Asian peers after intervention by the RBI, which has spent nearly $85 billion (£75bn) of its foreign reserves to defend the unit this year. India’s benchmark Sensex rallied 1.74 per cent following the rate announcement.