India’s central bank raised the key interest rate for a second straight month and pledged to withdraw the pandemic-era accommodation as it steps up its fight to tame prices that have been running above its target band since the beginning of the year.
The Reserve Bank of India’s rate-setting panel unanimously raised the repurchase rate by 50 basis points to 4.90%. Of the 41 economists in a Bloomberg survey, 17 expected a 50 basis point hike, while the rest pencilled in increases ranging from 25 basis points to 75 basis points. The increase was the biggest by the central bank in more than a decade.
“Inflation has steeply increased much beyond the upper tolerance level…sustained high prices could unhinge inflationary expectations and trigger second-round effects.”RBI Governor Shaktikanta Das in an online briefing.
Central banks worldwide are grappling with worse-than-anticipated inflation driven by supply chain disruptions, virus lockdowns and the war in Ukraine. India joins more than 50 monetary authorities, including the Federal Reserve, to have raised rates by at least a half-point in one move this year.
The central bank raised its inflation forecast for the year ending March to 6.7% from 5.7% seen previously. That would be outside the RBI’s mandated target range of 2%-6% and shows the rate-setting panel’s struggle to keep prices in check.
With inflation set to hover above the tolerance level for three quarters, the central bank also withdrew its intention of “staying accommodative.”
Under Indian laws, if inflation stays above 6% for three straight quarters, the central bank will have to write a letter to the government laying out the reasons for failing to meet its mandate as well as suggest remedial measures to bring prices under control.
Read also; India Imposes Restrictions on Sugar Exports to Cap a Price Surge.
