The Reserve Bank of India yesterday hiked interest rates for the third time in four months as Asia’s third-largest economy contends with a widening trade deficit and weakening currency.
The central bank raised its key lending rate by 50 basis points to 5.40 percent — a level previously seen in August 2019 — three months after beginning a monetary tightening cycle in May.
“Successive shocks to the global economy are taking their toll,” Reserve Bank of India Governor Shaktikanta Das said in a televised address, pointing to surging inflation and lower global growth.
“Disquietingly, globalization of inflation is coinciding with deglobalization of trade,” Das said. “The pandemic and the [Russia-Ukraine] war have ignited tendencies towards greater fragmentation.”
India bounced back strongly from the pandemic with one of the world’s fastest growth rates, but is now grappling with rising costs as commodity prices remain elevated.
The IMF last week slashed India’s growth outlook for the ongoing financial year ending March next year to 7.4 percent from the 8.2 percent it forecast in April.
A broad dollar rally in the past few months has contributed to the Indian rupee depreciating sharply to below 80, its lowest level against the greenback on record.
Das said the rupee has fared “much better” than other emerging-market currencies and “moved in a relatively orderly fashion, depreciating 4.7 percent against the US dollar” since April 1.
The Indian economy was “holding steady and progressing in an ocean of turbulence and uncertainty,” he said.
India’s merchandise trade deficit last month widened to a record US$31 billion, compared with US$10.6 billion in the same month last year, provisional data released on Tuesday showed.
Imports were more than twice as high as exports, led by petroleum products and coal.
India imports more than 80 percent of its crude oil needs and the country’s 1.4 billion people have been hit with rising gasoline costs.
Consumer inflation has consistently overshot the central bank’s 2 to 6 percent target range in the first six months of the year, hitting an eight-year high of 7.79 percent in April, before cooling to 7.01 percent in June.
The central bank retained its growth forecast at 7.2 percent for the 2022-2023 financial year and retained its inflation forecast at 6.7 percent.
Aggressive rate hikes by the US Federal Reserve have exacerbated outflows, with foreign investors withdrawing a net US$30 billion from debt and equity in the first half of this year.
India’s benchmark SENSEX erased early losses to trade 0.56 percent higher yesterday following the interest rate decision.
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