Mumbai: India’s central bank on Wednesday hiked rates for a second time, as Asia’s third-largest economy reels from galloping inflation in the wake of the Ukraine war.
The Reserve Bank of India raised its key repo rate by 50 basis points to 4.90%, a month after kicking off an aggressive monetary tightening cycle with a surprise 0.4 percentage point lift in May.
“The war in Europe is lingering and we are facing newer challenges each passing day,” Bank governor Shaktikanta Das said in a televised address, pointing to higher food and fuel prices.
He added that inflation was a global problem but emerging economies were facing “bigger challenges”, with market turbulence following monetary policy shifts in advanced economies.
India bounced back strongly from the coronavirus pandemic with one of the world’s fastest growth rates, but is now grappling with rising costs as commodity prices skyrocket worldwide.
Consumer inflation has consistently overshot India’s 2-6% target range in the first four months of the year, hitting an eight-year high of 7.79% in April.
“From the policy withdrawal perspective, the RBI in the last two months has moved quite aggressively and swiftly,” Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, said in a note.
But despite efforts to curb price pressures, inflation was likely to remain around 7% for the foreseeable future, she added.
India’s economy has seen sharp price increases across the board, including food and fuel.
Last month the government banned wheat exports to rein them in after a heatwave hit local crop yields.
Officials also capped sugar exports to safeguard supplies, and slashed duties on fuel and edible oils to buffer consumer spending.
India imports more than 80% of its crude oil needs, with its dependence growing as domestic production falls, and the country’s 1.4 billion people have been hit with rising petrol costs.
Prices have risen sharply since Russia’s invasion of Ukraine earlier this year, and economists estimate that a $10 per barrel increase in Brent crude increases consumer inflation in India by about 25 basis points.
The governor had extensively signalled Wednesday’s move in advance, calling a half-percent hike a “no brainer” in a television interview on May 23.
India’s 0.4% rate rise in May had caught markets by surprise, though economists supported the move as a necessary counterweight to inflation pressures.