India central bank raises key rate, says inflation battle not over By Reuters

By Swati Bhat and Chris Thomas

MUMBAI (Reuters) – The Reserve Bank of India’s key repo rate was raised by 35 basis points (bps) on Wednesday as widely expected, the fifth straight increase, with the central bank vowing there will be no let up in its fight to tame high inflation.

The monetary policy committee (MPC), comprising three members from the RBI and three external members, raised the key lending rate or the repo rate to 6.25% in a majority decision. Five of the six members voted in favour of the increase.

MPC’s voting patterns https://www.reuters.com/graphics/INDIA-ECONOMY/RATES/akveqzbbwvr/chart.png

A strong two-thirds majority in a Reuters analysts poll had predicted a 35 bps increase, smaller than its last three hikes of 50 bps each, and said it was still too soon for the central bank to take its eye off inflation, which has stayed above the upper end of the RBI’s 2-6% tolerance band all year.

India’s annual retail inflation eased to a three-month low of 6.77% in October, helped by a slower rise in food prices and a higher base effect, strengthening bets on smaller rate increases by the RBI going ahead.

Still, despite some signs of moderation, RBI Governor Shaktikanta Das said the main risk was that inflation could remain sticky and elevated.

“The MPC was of the view that further calibrated monetary policy action was warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects,” Das said as he announced the monetary policy committee’s decision.

“The focus on inflation control continues. There will be no let up in our efforts to bring inflation to more manageable levels,” he added.

Investors expect at least one more rate hike in the current cycle at the next meeting.

“The statement was slightly more hawkish than perhaps expected by markets, with no indication that the central bank is coming to the end of its rate hiking cycle for now,” Sakshi Gupta, principal economist at HDFC Bank said.

Other market watchers agreed.

“We continue to expect the focus of MPC to remain in a watchful mode as uncertainties on inflation settle down. We see a possibility of another 25 bps rate hike before a prolonged pause,” Upasna Bhardwaj, chief economist at Kotak Mahindra Bank said.

India’s bid to tackle inflation https://www.reuters.com/graphics/INDIA-ECONOMY/RATES/lgpdkwdyrvo/chart.png

The MPC also maintained its stance on “withdrawal of accommodation”, with four out of six members voting in favour as the committee continues to focus on pulling out high levels of cash from the banking system without stunting growth.

The MPC lowered its GDP growth projection for financial year 2022/23 to 6.8% from 7% earlier, while keeping its retail inflation forecast steady at 6.7%.

“Growth in India remains resilient in the international environment. A 6.8% growth (rate) is robust,” Das said.

India posted annual economic growth of 6.3% in its July-September quarter, slightly better than expected but less than half the 13.5% growth in the previous three months as distortions caused by COVID-19 lockdowns faded in Asia’s third-largest economy.

The Indian rupee dipped against the dollar after the policy decision and comments on inflation, while government bond yields rose.

The rupee was at 82.48, up from 82.53 before the decision, while the benchmark bond yield rose to 7.3087%, the highest in last two weeks and up from 7.2113% earlier.

The Nifty 50 index was down 0.37% at 18,574.45, as of 10:58 a.m IST, and the S&P declined 0.29% to 62,442.