Tackling inflation: India hikes interest rate by 35 basis points

Following the global trend barring a few exceptions like Turkey and Japan, the Reserve Bank of India (RBI) on Wednesday hiked the key policy rate by 35 basis points to 6.25 percent – a move designed to control retail inflation.

Meanwhile, the RBI lowered annual growth forecast to 6.8 percent from 7 per cent for the current financial year amid concerns over the bleak global economic outlook. However, the retail inflation forecast was retained at 6.7 percent.

“Growth in India remains resilient and inflation is expected to moderate,” RBI Governor Shaktikanta Das said, announcing the decision through a webcast. “But the battle against inflation is not over.”

The hike, fifth since May 2022, was a majority decision of the six-member Monetary Policy Committee (MPC) with five members recommending the increase.

Reacting to the move, stocks erased gains to trade down 0.3 percent and bond yields jumped about 5 basis points after the move, perceived as hawkish by some market watchers.

“Today’s MPC sounds hawkish,” said Marzban Irani, chief investment officer for debt at LIC Mutual Fund Asset Management. “The market needs to keep a close watch on global rate hikes and sticky core inflation.”

The decision comes a day after the Australian central bank on Tuesday increased the interest rate by a quarter-percentage point to 3.1 percent.

In the US, the stocks tumbled Tuesday as a repeat of the previous session with the fears of recession gripping the Wall Street and the top CEOs critical of the Federal Reserves’ policy of interest hike.

By the time trading was closed, the S&P 500 shed 1.44 percent to close at 3,941.26 and the Nasdaq Composite sank 2 percent to finish at 11,014.89. The Dow Jones Industrial Average dropped 350.76 points, or 1.03%, to settle at 33,596.34.

The RBI hiked the policy rate in a bid to bring down inflation from the current level. Inflation in October eased to 6.77 per cent, a three-month low, but it remains well above the RBI’s comfort level of 4 per cent. But the worry for the central bank is the rise in core inflation — the non-food, non-oil part of inflation — that edged up again after moderating over the summer.

It has already intervened to support the rupee and further rate rises are likely to support the currency and to curtail underlying inflationary pressure. Analysts expect the central bank to raise the rate to 6.50 per cent by February 2023 and then hold this rate throughout the rest of 2023.

Erdogan’s Turkiye is an exception

When the central banks around the world are going for higher interest rates, Turkey under the policy of President Erdogan is moving in opposite direction.

Last month, Turkey’s central bank delivered another outsized interest rate cut despite inflation running at more than 85 percent, as the benchmark policy rate was slashed by by 1.5 percentage points to 9 percent, following a series of similar jumbo cuts.

The move is in line with Erdogan’s unorthodox economic views that high borrowing costs cause high inflation, even though traditional economic thinking says raising interest rates help tame inflation.

Erdogan had called for a single-digit interest rate by the end of the year. He is counting on lower borrowing costs to propel the economy as Turkey gears up for presidential and parliamentary elections next June.

The bank had similarly cut borrowing costs by 1.5 points last month and by 1 point each in August and September.

“Did we go down to single digits on the interest rate? We did. And it will continue like this. Don’t worry, inflation, too, will go down,” the Turkish president said in a recent speech.

The annual consumer inflation eased to 84.4% in November from a 24-year high of 85.5 percent the previous month, slowing for the first time in 18 months, official data shows, as prices rose 2.9 percent on a monthly basis.

Inflation in Turkey was stoked by a series of unorthodox rate cuts by the central bank starting in September 2021 that sent the Turkish lira into a tailspin.

However, food prices — a main driver of Turkey’s inflation and a top popular grievance — increased by 5.75 percent in November from the previous month and 102.5 percent year-on-year.

Japan too sticks with lower rates

As a top economist on Tuesday warned of Japan going into recession, the country’s central bank vowed to continue with the policy of maintaining low interest rate.

“We think the Japanese economy will enter a recession sometime next year,” Marcel Thieliant, senior Japan economist at Capital Economics, said, reported CNBC.

However, Bank of Japan (BOJ) Governor Haruhiko Kuroda reportedly brushed off the possibility of reviewing the current stance of maintaining low interest rates.

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