The Reserve Bank of India announced a surprise 40 basis point interest rate increase on Wednesday, the first hike in nearly four years, in response to alarm over the surge in global inflation triggered by the Ukraine war.
The RBI raised its benchmark repo rate to 4.4 per cent, up from a record low of 4 per cent left in place since rates were cut at the start of the Covid-19 pandemic in May 2020.
The move is the latest example of how the conflict in Europe is pushing central bankers in developing countries to raise rates to try to contain an upward spiral in prices for essential commodities like food and fuel.
Policymakers in India, the world’s fastest-growing large economy, have been keeping rates on hold to protect the country’s economic recovery from the pandemic. But Governor Shaktikanta Das said rising prices of commodities, including crude and edible oils, both of which India imports in large quantities, led policymakers to make the first increase in borrowing costs since 2018.
“Persistent and spreading inflationary pressures are becoming more acute with every passing day,” Das said in a televised address after the unscheduled monetary policy meeting. Global food prices have risen to record heights since the outbreak of the conflict.
The move rattled financial markets, with the benchmark Sensex equity index falling more than 2 per cent on Wednesday. India’s 10-year government bonds fell 1.8 per cent, according to Bloomberg.
“We did expect the RBI to start doing things . . . but it’s quite surprising, the magnitude as well as the timing,” said Shumita Deveshwar, a senior director at research firm TS Lombard, arguing that the RBI should have acted sooner.
Inflation has long proved politically sensitive in India, a country of 1.4bn people, with analysts arguing that elections have been won and lost on the back of high prices for onions and other staples.
“The fact that they’ve been so relaxed about [inflation] has been surprising,” Deveshwar said. “We have seen this in the past: once the inflationary pressures start to build up, it’s very hard to cap them.”
India’s consumer inflation index jumped to 6.95 per cent in March from a year earlier, well above the 6 per cent upper limit of the RBI’s target inflation band. Das said he also expected April’s figure to be “elevated”.
The RBI held its regular monetary policy meeting last month, at which it decided to hold rates but signalled that it would wind down its “accommodative” stance.
The announcement came ahead of the US Federal Reserve’s own policy statement due on Wednesday, at which the Fed is expected to raise its benchmark rate by half a percentage point.
The central bank has typically raised rates by 25 basis point increments. Wednesday’s 40 basis point increase was the largest since 2011.
“My personal reaction is that this sort of a sudden rate hike without an advance warning does not speak well of the Reserve Bank of India,” India’s former chief statistician Pronab Sen said.
Sen added that a 40 basis point increase would leave investors wondering if more rate rises were coming: “The level of uncertainty will go up, and that’s never good for markets.”
Concerns about global inflation have triggered heavy selling of Indian equity and debt by foreign investors, with net foreign portfolio outflows every month since October.
Source: Economy - ft.com
