trending Market Intelligence /marketintelligence/en/news-insights/trending/-gCQBYvEkziLdKxh6vbhMQ2 content esgSubNav
In This List

Indian central bank makes latest rate hike with 1st increase in 4 years

Podcast

Street Talk Episode 87

Blog

A New Dawn for European Bank M&A Top 5 Trends

Blog

Insight Weekly: US banks' loan growth; record share buybacks; utility M&A outlook

Blog

Banking Essentials Newsletter 2021: December Edition


Indian central bank makes latest rate hike with 1st increase in 4 years

The Reserve Bank of India on June 6 became the latest emerging-market central bank to increase interest rates, raising its benchmark rate for the first time in four years as surging crude prices prompted it to revise its inflation projections upward.

The repo rate will increase 25 basis points to 6.25%. The bank also lifted its reverse repo rate 25 basis points to 6.0% and hiked both the marginal standing facility rate and bank rate by 25 basis points to 6.50%. It had last increased rates in January 2014.

The RBI revised upward its consumer price inflation projection to between 4.8% and 4.9% in the first half and 4.7% in the second half, citing a sharp rise in prices of goods, excluding food and fuel, in April and a recent surge in crude prices. Excluding the impact of higher house rent allowances for central government staff, inflation is projected at 4.6% in the first half and 4.7% in the second half.

This compares with the bank's April projections of between 4.7% and 5.1% in the first half and 4.4% in the second half. The bank has a medium-term inflation target of 4%.

"Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook — both on the upside and the downside," RBI said in its statement, adding that heightened price expectations could pose risks to wages and input costs.

The central bank maintained its GDP growth forecast at 7.4% in 2018 on the back of robust of investment activity despite tightening financing conditions and buoyant global demand. However, it said a sharp rise in petroleum product prices will likely weigh on disposable incomes, and manufacturing activity will likely moderate marginally in the second half.

The rupee was up 0.15% following the rate decision, after falling more than 5% year-to-date against the dollar. Analysts at ING, who expected the rate hike, said the rupee's year-to-date fall versus the dollar is the steepest among Asian currencies and has intensified inflation risks. They expect further pre-emptive tightening by 25 basis points at the August meeting.

Rising oil prices have also put pressure on India's current account deficit, which could further weigh on the rupee but has had a "less debilitating" impact on inflation, analysts at Société Générale said in a June 4 note. Brent crude prices have risen about 12.7% in the past two months.

The rupee's recent slide is part of a broader selloff in emerging markets that has prompted other central banks from Turkey to Indonesia to raise interest rates, analysts said.