India central bank hikes policy rates anew; cuts GDP growth forecast to 6.8%
MUMBAI (ICIS)–India’s central bank hiked its benchmark interest rate for the fifth time since April as it continues to battle high inflation, prompting a cut in GDP growth projection for the fiscal year ending March 2023 to 6.8% from 7.0%.
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) raised its repo (repurchase) rate by 35 basis points (bps) to 6.25%, while retaining its retail inflation forecast for the current fiscal year at 6.7%.
The repo rate is the rate at which the RBI lends money to commercial banks. The central bank has now raised the repo rate five times since its first unscheduled hike in May
“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,” RBI governor Shaktikanta Das said.
The MPC has raised the repo rate to bring down the elevated inflation levels, Das said, adding that the aim is to bring inflation below 6% and then gradually to 4%. RBI has a target to keep inflation at 2-6%.
But since January this year, India’s inflation has remained above 6%.
In October, India’s consumer price index (CPI) increased by 6.77% year on year, still elevated but lower than the 7.41% recorded in teh previous month.
Inflation has remained elevated due to supply-side disruptions caused by the COVID-19 pandemic and a surge in global commodity prices following Russia’s invasion of Ukraine in late February.
“The Ukraine war has fundamentally changed the world economic outlook. Emerging countries have been among the worst affected,” Das said.
India’s central bank has increased its inflation projection for the October-December 2022 period to 6.6% from an earlier projection of 6.5%.
For the whole fiscal year ending March 2023, retail inflation forecasts were revised to 5.9% from 5.8%.
For the first quarter of the next financial year (April-June 2023), inflation is projected to be at 5%, before rising to 5.4% in the succeeding quarter, according to MPC.
Rising inflation has prompted RBI to hike its benchmark interest rates repeatedly since its unexpected 40bps increase in May.
As high inflation accompanied with rising interest rates stifles economic activity, India’s central bank has shaved its full-year GDP projection twice since its original forecast of 7.2% for the current fiscal year.
Despite the cut in full-year GDP growth forecast below 7%, India is still expected to be among the fastest-growing major economies, Das said.
Meanwhile, the World Bank revised up on 6 December its GDP growth forecast for India to 6.9% from 6.5% previously, citing resilience in the country’s economic activity despite a deteriorating external environment.
In July-September 2022, the economy posted a 6.3% year-on-year growth despite inflationary pressures “driven by strong private consumption and investment”, the Bank said in its country update.
“India’s economy has been remarkably resilient to the deteriorating external environment, and strong macroeconomic fundamentals have placed it in good stead compared to other emerging market economies,” World Bank’s country director for India Auguste Tano Kouame said.
Focus article by Priya Jestin
Click here to read the Ukraine topic page, which examines the impact of the conflict on oil, gas, fertilizer and chemical markets.
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