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Indian Central Bank Hikes Rates by More Than Expected, Vows More Tightening

Economy Aug 05, 2022 13:18
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By Ambar Warrick

Investing.com-- The Reserve Bank of India (RBI) hiked its benchmark rate by more than expected on Friday and vowed to further tighten monetary policy, citing a clear threat to economic growth from rising inflation.

In a live address, RBI Governor Shaktikanta Das said the bank had decided to raise rates by 50 basis points to 5.4% from 4.9%. Markets were expecting a hike of 35 basis points.

Das said that a current uptrend in inflation meant that the bank will continue to hike rates until inflation reaches its target range, adding that the bank would do “whatever it takes” to ensure a soft landing from the COVID-19 pandemic.

The USD/INR reacted positively to the hike, rising 0.2% to 79.017.

With Friday’s hike, Indian interest rates are now at pre-pandemic levels, highlighting the extreme economic headwinds faced by the Indian economy from rising food, metal, and oil prices earlier this year.

But Das said that a recent decline in global commodity prices was now helping ease some inflationary pressures in the country. Oil and metal prices have fallen considerably from their peaks this year.

The RBI governor said annual inflation is projected at 6.7% in 2022-2023, and is expected to ease further to 5% by the first quarter of 2023. India’s annual CPI inflation rate was 7.01% as of June. The RBI is targeting an annual inflation rate of 4%.

Considering the recent dip in commodity prices, Das forecast that the Indian economy will see real GDP growth of 7.2% in 2022-2023- down from 8.7% in 2021.

The Reserve Bank began hiking rates in May this year, as a spike in oil prices drove the rupee to a record low of over 80.

But the RBI governor attributed the weakness in the rupee to headwinds from commodity markets and the U.S. dollar, and said that India’s foreign exchange reserves remained strong.

Indian Central Bank Hikes Rates by More Than Expected, Vows More Tightening
 

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