India’s central bank on Wednesday raised rates by 0.5% for the second time in two months, as Asia’s third-largest economy suffered from high inflation due to the war in Ukraine.
The Reserve Bank of India (RBI) raised its key rate by 50 basis points to 4.90%, just one month after beginning an aggressive monetary tightening cycle.
The war in Europe continues and we face new challenges with each passing day, RBI Governor Shaktikanta Das said in a televised address.
Mr. Das explained that inflation was a global problem but that emerging economies faced greater challenges, with market turmoil following changes in monetary policy in advanced economies.
On May 4, the centarle bank decided on a surprise increase of 40 basis points.
Since then, the governor of the RBI had amply signaled the decision announced on Wednesday, in particular during a television interview broadcast on May 23 in which he had stipulated that a forthcoming rate hike was self-evident.
Asia’s third largest economy has rebounded strongly from the pandemic with one of the fastest growth rates in the world but is now facing rising prices due to soaring commodity prices.
During the first four months of the year, consumer price inflation steadily broke out of the target range of 2-6% set by the monetary policy committee, reaching a record high of 7.79% in April.
However, economists expect inflation to remain just as severe.
Despite government interventions on the supply side to reduce pressure on prices, the foreseeable trajectory of inflation remains close to 7%, warned Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, in a note.
The RBI has acted quite aggressively and swiftly over the past two months, she pointed out.
The surge is due to sharp price increases in all sectors, including food and fuel, which prompted the government to reduce tariffs on fuel and edible oils last month.
During the same period, the government banned wheat exports to curb soaring prices after a heat wave affected local crop yields. It also capped sugar exports to preserve its own stocks.
India is the world’s largest importer of edible oils, especially palm and soybean oil.
The country of 1.4 billion people also imports more than 80% of its crude oil needs, and its dependence is growing as domestic production declines.
Prices have risen sharply since the Russian invasion of Ukraine, and economists estimate that a $10 per barrel rise in Brent fuel increases consumer price inflation in India by around 25 basis points.