India’s central bank hikes interest rate more than expected to tame inflation

India hikes interest rate more than expected

MUMBAI, India — India’s central bank raised a key interest rate more than expected Thursday — its fifth rate hike this year — as it continues its fight against high inflation.

The Reserve Bank of India raised the repo rate — at which it makes short-term loans to commercial banks — by a quarter percentage point to 6 percent with immediate effect. It raised the reverse repo rate — the rate at which it borrows from commercial banks — by an unexpected half percentage point to 5 percent.

Economists had expected quarter point hikes in both rates, which still remain below pre-crisis levels.

“The magnitude has been steeper than expectations,” said Yes Bank chief economist Shubhada Rao.

“Even the tone remains more hawkish than we were anticipating. Inflation as a concern remains the most dominant policy focus.”

She expects the bank to hike rates again, by a quarter point, when it meets in November.

“Inflation remains the dominant concern,” the Reserve Bank said in a statement. “Essentially, inflation rates have reached a plateau, but are likely to remain at unacceptably high levels for some months.”

“Inflation remains the dominant concern,” the bank said in a statement. “Essentially, inflation rates have reached a plateau, but are likely to remain at unacceptably high levels for some months.”

It’s not just the price of food — which was hit by a poor harvest and rose 14 percent in August — that is costly. The bank said two-thirds of August’s 8.5 percent inflation was driven by nonfood products. The bank would like to see prices rising in line with historical norms of 5 to 5.5 percent.

From April to June, average monthly inflation was 10.6 percent.

Over the same period, the economy grew 8.8 percent — an indication, the bank said, that India’s recovery is consolidating and resuming pre-crisis growth rates.

Surging industrial production of 13.8 percent in July, along with good prospects in the service sector and in agriculture, thanks to strong rains, all point to “sustained growth,” the bank said.

The bank said it has been concerned that real interest rates in India are negative, thanks to loose monetary policy and high inflation. This has been a drag on bank deposit growth as savers look for higher returns elsewhere, it said.

Commercial banks are India’s most important source of corporate financing, as the corporate bond market is thin.

“If bank credit is not to become a constraint to growth, real rates need to move in the direction of encouraging bank deposits,” the Reserve Bank said.

It also said that Europe’s “remarkable resilience” and a resurgent China have emboldened global investors to continue to put their money in emerging markets like India, allaying earlier fears about India’s widening trade and current account deficits.

“Should the global situation stabilize, it will help contain volatility in capital flows. But the flip side of that will be the possible firming of commodity prices and consequent inflationary pressures,” the bank said.