India’s central bank hikes interest rates by 50 bps to fight off ‘globalised’ inflation

• The Reserve Bank of India today hiked interest rates for the second consecutive month, from 4.4% to 4.9%.
• The rate hike comes at a time when inflation has been surging and demand in rural India has been plateauing, signaling economic distress.
• RBI governor Shaktikanta Das said that the rate hike should help it fight “globalised inflation”.

The Indian central bank today raised its interest rates – the second time in a month - by 50 basis points. This is higher than last month’s hike of 40 basis points and the base interest rate at which the central bank lends is now at 4.9%.

"The repo rate still remains below its pre-pandemic level," Shaktikanta Das, the governor of Reserve Bank of India (RBI) said while making the announcement.

This move is part of a long crusade that the Indian government and the central bank’s crusade against the rising cost of essentials and non-essentials in the country. For the month of April, the consumer price inflation touched 7.8%, stressing out household budgets.

Das said that the Russia-Ukraine war has led to the ‘globalization’ of inflation – stopping short of blaming the West for its sanctions regime which has resulted in an increase in prices of everything, from crude oil to food grains and commodities.

The RBI governor also said that the inflation forecast for the current year is at 6.7%.

The benchmark Nifty50 and Sensex were marginally in the red, reacting to RBI’s rate hike. Experts, however, believe that the market has also “priced-in” the rate hike, meaning that the impact of higher interest rates has already been anticipated and accounted for by the stock markets.

Das also sounded slightly positive about the rural economy, saying it is “gradually improving”, while he sounded more optimistic about the urban economy, saying it is recovering.

He retained India’s GDP estimate for FY23 at 7.2%, slightly lower than IMF’s 7.5% forecast after its latest downward revision.

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