India’s Central Bank Opts for Modest 35-Basis-Point Hike in Policy Rate

A Reserve Bank of India logo is seen on the main entrance gate of the RBI headquarters in Mumbai, India, on April 1, 2014. Indranil Makherjee/AFP/Getty Images

The Reserve Bank of India (RBI) on Wednesday increased its policy repo rate by 35 basis points to 6.25 percent, the fifth consecutive increase this year, signaling a moderate pace in monetary tightening.

The RBI also increased its standing deposit facility rate and the marginal standing facility rate to 6 percent and 6.5 percent, respectively.

RBI Governor Shaktikanta Das said the monetary policy committee (MPC) has decided to remain focused on the “withdrawal of accommodation,” given that the overall monetary and liquidation conditions remain accommodative.

India’s consumer price inflation moderated to 6.8 percent year-over-year in October. However, Das said that inflation remains elevated as the figure remains above the upper tolerance band of the target.

Das projected that inflation would remain above the 4 percent target over the next 12 months.

“On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects,” he said in a statement.

The RBI predicted that India’s gross domestic product (GDP) would increase by 6.8 percent in the current fiscal year and by 4.4 percent in the third quarter of 2023.

On the currency front, Das said the Indian currency appreciated by 3.2 percent in real terms from April to October, even as major currencies have depreciated, which indicated India’s resilience and stability.

“GDP growth in India remains resilient, and inflation is expected to moderate, but the battle against inflation is not over,” he stated. “Pressure points from high and sticky core inflation and exposure of food inflation to international factors and weather-related events do remain.”

The RBI previously increased its lending rate by 40 basis points in May and 50 basis points in June, August, and September.

Economists’ Response

Sakshi Gupta, principal economist at India’s HDFC Bank, characterized the RBI’s statement as “hawkish” with no indication that the central bank is nearing the end of its rate-hiking cycle.

“The reiteration of the fact that growth continues to be resilient while there are upside risks to inflation suggests the central bank’s resolve to not let up its fight against inflation continues,” Gupta told Reuters.

“This, at the margin, could provide soft support for the rupee—especially ahead of the U.S. Federal Reserve meeting next week. We continue to expect another rate hike in the Feb policy of 25 bps,” he added.

Upasna Bhardwaj, chief economist at India’s Kotak Mahindra Bank, told Reuters that the recent policy rate increase was anticipated and projected a further rate increase by the central bank.

“We continue to expect the focus of MPC to remain in a watchful mode as uncertainties on inflation settle down. We see a possibility of another 25 bps rate hike before a prolonged pause,” Bhardwaj said.