On Wednesday, India’s central bank raised rates a second time as Asia’s third-largest economy recovered from a surge in inflation as a result of the Ukrainian war.
The Reserve Bank of India showed a staggering 0.4 percent increase in May, raising its major repo rate by 50 basis points to 4.90 percent a month after launching an aggressive monetary tightening cycle.
“The war in Europe is protracted and faces new challenges every day,” Bank Governor Shakticanta Das said in a television speech, pointing out rising food and fuel prices.
Inflation was a global problem, but emerging economies face “bigger challenges” and market turmoil continues with the shift in monetary policy in advanced economies, he added.
India has made a strong recovery from the coronavirus pandemic at one of the fastest growing rates in the world, but is now working to raise costs as commodity prices skyrocket worldwide.
Consumer inflation consistently exceeded India’s 2-6% target in the first four months of the year, reaching a eight-year high of 7.79% in April.
“From a policy withdrawal perspective, the RBI in the last two months has moved very aggressively and swiftly,” said Upasna Baldowazi, senior economist at Kotak Mahindra Bank.
However, she added that inflation is likely to remain at around 7% for the foreseeable future, despite efforts to curb price pressures.
India’s economy, including food and fuel, is experiencing a sharp rise in prices across the board.
Last month, the government banned wheat exports after a heat wave hit local yields.
Authorities also restricted sugar exports to protect supplies and reduced tariffs on fuels and cooking oil to buffer personal consumption.
India imports more than 80% of its crude oil demand and becomes more dependent on it as domestic production declines, with 1.4 billion people in the country suffering from rising gasoline costs.
Prices have risen sharply since Russia’s invasion of Ukraine earlier this year, and economists estimate that a $ 10 increase in Brent crude oil will raise India’s consumer inflation by about 25 basis points. increase.
The governor broadly signaled Wednesday’s move in advance and called a half-percent hike “brainless” in a television interview on May 23.
Economists supported the move as a necessary counterweight to inflationary pressure, but India’s 0.4% rate hike in May surprised the market.