RBI raises interest rates by 25bps, vows more hikes to curb sticky inflation

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RBI raises interest rates by 25bps, vows more hikes to curb sticky inflation
Credit: © Reuters.

By Ambar Warrick

Investing.com -- The Reserve Bank of India raised interest rates as expected on Wednesday, but ducked market expectations for a pause in its rate hike cycle and reiterated its commitment to tightening monetary policy due to stubborn core inflation.

The RBI hiked its policy repo rate by 25 basis points (bps) to 6.50%, in line with market expectations. Wednesday’s move marks its fifth hike since the beginning of a rate hike cycle in early-2022.

RBI Governor Shaktikanta Das said that while the Indian economy was stable in the face of global headwinds, more action was required to contain high inflation. This largely undermined market expectations for an end to the bank’s current rate hike cycle.

Market bets on a potential pause in the RBI’s rate hike cycle had risen in recent months, tracking a decline in Indian consumer price index (CPI) inflation.

Das noted that even as overall inflation retreated on a quicker-than-expected drop in food and fuel prices, core inflation, which excludes the two factors, remained "sticky".

The RBI governor also said that inflation is likely to remain above the RBI’s 4% annual target in the coming years, and said that CPI inflation will end the current fiscal year at 6.5%, and will likely ease to 5.3% in fiscal 2023-2024.

“We need to see a decisive moderation in inflation… we have to remain unwavering in our commitment to bringing down CPI inflation. Monetary policy has to be tailored to ensuring a durable disinflation process,” Das said in a livestream.

He noted that volatility in commodity prices, especially oil , and increased input costs still presented an upside risk to inflation.

The Indian rupee reacted positively to the move, rising 0.3% and dodging a broader decline in Asian currencies.

Indian economic growth is also expected to remain steady in the coming months, with the RBI forecasting real GDP growth for fiscal 2023-2024 at 6.4%. Indian stocks rallied on the strong economic forecast, with the Nifty 50 and BSE Sensex 30 indexes rising 0.5% and 0.6%, respectively.

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