The Reserve Bank of India is keeping the country's key policy rate unchanged at 8%, but is reducing the mandatory amount of bonds lenders must park at the RBI by 50 basis points to 22.5% of deposits, starting in mid-June - AFP Photo.
MUMBAI: India’s central bank raised its benchmark interest rate to the highest in two years as it stepped up efforts to curb inflation and stem capital outflows.
The six-member monetary policy committee voted to raise the repurchase rate to 6.5 percent, a move predicted by 40 of the 53 economists in a Bloomberg survey. It kept the policy stance neutral.
The MPC notes that domestic economic activity has continued to sustain momentum and the output gap has virtually closed, the Reserve Bank of India said in a statement Wednesday. However, uncertainty around domestic inflation needs to be carefully monitored in the coming months.
The RBI’s rate move is the second in eight weeks and follows emerging-market counterparts in Indonesia, the Philippines and elsewhere who are trying to counter currency routs triggered by higher U.S. rates and a stronger dollar.
The rupee is down nearly 7 percent against the dollar this year to be the worst performer in Asia.
Key Points
Inflation projected at 4.8% in 2H of FY19; 5% in 1Q of FY20 with risks evenly balancedGrowth projection of FY19 retained; 1Q FY20 growth seen at 7.5%
Inflation has been running well above the central bank’s medium-term target of 4 percent, with the outlook set to worsen as oil prices stay elevated and the currency weakens. Higher government prices for some food crops also poses upside risk to inflation.
The currency and inflation woes come against the backdrop of an economy that’s growing faster than any other major nation, strengthening Prime Minister Narendra Modi’s position as he prepares for elections next year.
But risks to the outlook are formidable: as the world’s fastest-growing oil consumer, higher crude prices will push up the current-account deficit, while global trade tensions threaten exports and investment.
The economy’s strong performance gives policy makers another reason to hike rates. Core inflation -- which strips out volatile food, fuel and light prices -- has been sticky at a four-year high of more than 6 percent, indicating demand pressures in the economy.
The RBI has sold dollars steadily to smooth the volatility in the currency market and Governor Urjit Patel has expressed worries about the emerging market turmoil, arguing that the Fed’s plans to shrink its balance sheet was adding to risks to global growth. - Bloomberg
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