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India raises interest rates again

India’s central bank on Friday raised its key rate for the fourth time in five months in an attempt to offset high inflation and a depreciation of the rupee.

The Reserve Bank of India (RBI) raised its key interest rate by 50 basis points to 5.90%, which represents a total increase of almost two points since the beginning of its monetary tightening cycle in May.

Asia’s third largest economy had rebounded strongly from the Covid-19 pandemic with one of the highest growth rates in the world, but it is now facing headwinds that are rocking the entire global economy.

The global economic outlook remains bleak, RBI Governor Shaktikanta Das said in a televised address.

The sharp rate hikes and disquieting comments from other major central banks are a third major shock to the global economy, after the pandemic and the war in Ukraine, he added.

Recent rate hikes and the prospect of further significant hikes have led to tighter financial conditions, extreme volatility and risk aversion, Das said.

Consumer price inflation has consistently exceeded the 2-6% range set by the central bank for this year.

According to the latest figures, inflation reached 7% in August, mainly due to rising food prices.

The RBI maintained its inflation forecast for 2022-23 at 6.7% and 5% for the second quarter of 2023.

Its growth forecasts for the 2022-23 financial year have been revised downwards, to 7% against 7.2% previously.

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Rising global energy prices sent India’s trade deficit skyrocketing to $23.9bn in the second quarter, nearly double from the first and the highest since 2013 .

India imports more than 80% of its crude oil needs and rising petrol costs have led to spikes in consumer prices for its 1.4 billion people.

The Indian rupee has plunged 10% this year to hit a record low of 81.95 rupees to the US dollar earlier this week.

India’s currency has proven more resilient than other Asian currencies after intervention by the RBI, which this year spent nearly $85 billion of its foreign exchange reserves to defend it.

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