India’s central bank raises interest rate to tame inflation

The Reserve Bank of India on Wednesday raised its key interest rate to 4.4 per cent from four per cent in a surprise move aimed at taming the fast-rising inflation Asia’s third-biggest economy faces in the wake of the Ukraine war.

The critical move by the apex bank will help mop up excess liquidity and bring down the elevated inflation which is already close to 7.0 per cent.

The hike in repo rate — the key policy rate of RBI or the rate at which it lends to banks — will lead to rising cost of funds for banks. This will prompt banks and other non-banking financial companies to raise the lending and deposit rate in the coming month. The RBI last hiked the repo rate by 25 basis points to 6.50 per cent in August 2018.

Analysts said the immediate fallout of the RBI move is a rise in equated monthly installments (EMIs) on home, vehicle and other personal and corporate loans. Deposit rates are also set to rise after the repo rate hike for the first time in nearly four years.

RBI Governor Shaktikanta Das said after an unscheduled meeting of the bank’s monetary policy committee that the central bank would maintain an “accommodative” stance to help support the economy while keeping inflation in check.

The announcement came hours before the US Federal Reserve was expected to undertake its largest rate hike in two decades in response to accelerating inflation in the world’s biggest economy. This could spark capital outflows from emerging markets such as India.

“We, in the RBI, remain steadfast in our commitment to contain inflation and support growth. Inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth. The biggest contribution to overall macroeconomic and financial stability as well as sustainable growth would come from our effort to maintain price stability,” the RBI Governor said.

Analysts said the move came as a surprise as the RBI’s next meeting to set interest rates wasn’t scheduled until June 8.

In the first scheduled monetary policy announcement of the current financial year on April 8, the RBI had decided to keep the key policy rates unchanged for the 11th time in a row.

But in its first clear signal of a future rate hike, the RBI governor had said the bank was “focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.”

“Looking ahead, further rate hikes look nailed on. After all, the rise in headline inflation has further to run,” Shilan Shah of Capital Economics said in a report.

In 2020, the RBI cut its benchmark rate from 5.1 per cent to four per cent, the lowest level since March 2010, to ease financing woes during the pandemic.

— issacjohn@khaleejtimes.com