The Reserve Bank of India lifted the repo rate by 25 basis points to 5.5 percent and shifted to a calibrated-tightening stance as inflation forecasts rose.
India's central bank raised its benchmark repo rate by 25 basis points to 5.5 percent on Wednesday, the first increase in nearly four years. The six-member panel voted unanimously, Reuters reported from Mumbai.
Governor Sanjay Malhotra said headline consumer inflation is expected to average almost 5.8 percent over the next three quarters and that recalibrating the policy rate is imperative. The bank lifted its inflation forecast for the current financial year to 5.2 percent from 5 percent and its GDP growth forecast to 7.1 percent from 6.7 percent.
The bank changed its stance from neutral to calibrated tightening. Malhotra said that stance means a milder, more data-dependent form of tightening, and that the duration and extent of any further increases depend on growth and inflation. August consumer inflation was 4.82 percent, a third month above the 4 percent target.
Reuters linked the move to higher oil prices from the Iran war and weak monsoon rains tied to El Niño. The rupee later traded at 96.8450 per dollar, near a May record low of 96.96. Malhotra said markets can be irrational in the short run and that several measures, including the real effective exchange rate, suggest the rupee may be undervalued.
The 10-year bond yield was slightly higher at 7.2269 percent and the Nifty 50 was down 0.3 percent but off the day's lows. HDFC Bank economist Sakshi Gupta said she expects another 50 to 75 basis points of hikes if the West Asia conflict keeps oil prices high.
People Sentiments Mixed
- Sanjay Malhotra said recalibrating the policy rate is imperative because inflation is not as benign as last year.
- Malhotra said markets can be irrational in the short term and that the rupee may be undervalued.
- Sakshi Gupta of HDFC Bank said another 50 to 75 basis points of hikes are possible if oil stays elevated.