India's central bank raises a key rate to its highest level in three years

India's economy is expected to grow at 7% during this fiscal, down from the 7.2% forecast earlier.
On a tightrope.
On a tightrope.
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The Reserve Bank of India (RBI) is catching up with other global central banks in reining in inflation.

The central bank today (Sep. 30) raised its repo rate—at which it lends to commercial banks—to 5.90%, up by 50 basis points (bps). This marked the fourth rate hike in a row amid rising concerns over inflation, global headwinds, and the rupee’s plunge to record lows.

The move comes amid a tightening cycle by global central banks, especially with the US’s Federal Reserve predicted to continue raising interest rates until 2023.

“We are in the midst of a third major shock—a storm—arising from aggressive monetary policy actions and even more aggressive communication from advanced economy (AE) central banks,” RBI governor Shaktikanta Das said in his statement (pdf), citing the Covid-19 pandemic and the Ukraine war as first two shocks.

The RBI’s monetary policy committee (MPC) will remain focused on “withdrawal of accommodation while supporting growth,” Das said. This implies more rate hikes in the coming months, according to Aurodeep Nandi, India economist of Nomura.

Economists expect one more 50-bps increase this fiscal to 6.40-6.50%.

India’s growth is likely to remain subdued

The MPC cut its economic growth outlook for India in the face of geopolitical tension, a potential decline in international demand, and monetary policy tightening. It now sees the economy growing at 7% this year, down from the 7.2% forecast in August.

“Merchandise exports growth faced headwinds in an unsettled external environment,” Das said.

The MPC expects consumption demand to revive in the ongoing festive season in urban India, but rural demand has remained subdued. Moreover, such steep increases in interest rates may only dampen demand.