India's central bank raised its benchmark interest rate for the first time since 2014 and set the stage for a gradual adjustment cycle as economic growth rebounds from a four-year low and price pressures.
Six-member monetary policy The Committee voted unanimously to increase the repurchase rate from 6 percent to 6.25 percent, as predicted by 14 of the 44 economists in a Bloomberg survey. The policy position remained neutral, the Reserve Bank of India said in a statement in Mumbai on Wednesday.
Indian bonds fell while the rupee advanced when the RBI joined its peers in Indonesia, Turkey and Argentina in raising rates as the tightening of US policies. UU wreaks havoc in emerging markets. Governor Urjit Patel recently asked the Federal Reserve to reduce the pace at which it plans to reduce its balance to help emerging economies cope with the crisis.
The RBI cited volatile oil prices and developments in the global financial market as risks that will force policy makers to remain vigilant. Oil is India's largest import and the increase in prices is a threat not only for inflation, but also for the nation's considerable trade deficit, putting more pressure on the currency.
The growth in consumer prices is already above the 4 percent target and with economic activity showing more signs of recovery, analysts say that a rate hike, which reverses the cut last August, does not It should paralyze the activity.
The forecast of normal monsoon rain is good for the agricultural sector, Patel said in a statement. press conference in Mumbai. Capacity utilization has increased and a private survey shows that the factory's activity is in expansion mode in the last 10 months. Investment activity is expected to be robust despite tightening financial conditions in recent months, he said.
The RBI maintained its GDP growth projection at 7.4 percent in the financial year through March 2019. More importantly, revised the CPI forecast a range of 4.8 percent to 4.9 percent for the first half of the year from 4.7 percent to 5.1 percent, and raised the second half estimate to 4.7 percent from 4.4 percent.
"Raising rates is a correct move," said NR Bhanumurthy, an economist at the National Institute of Public Finance and Politics in Delhi. "Given international conditions, rising oil prices, the Fed's rate policy and the fact that other emerging markets have already started raising rates, the RBI should have raised rates earlier."
What our economists say …  The surprise decision of the Reserve Bank of India to raise interest rates shows a firm intention to keep inflation under control in the face of the oil supply shock. It is likely to affect the recovery of growth and, in our view, become a single policy error. Inflation and growth are already about to slow down in the coming months when the base effects begin.
|– Abhishek Gupta, Bloomberg Economics|
India has been dragged down by the ruin of an emerging market, driven by a stronger dollar and higher US interest rates The rupee fell 4.6 percent against the US dollar year, the worst performance in Asia.
"We believe both growth and inflation are likely to rise in the coming months," said Nomura Holdings Inc. analysts Sonal Varma and Aurodeep Nandi. note, and adds that paves the way for another increase of 25 basis points in August. But a pause later is more likely as the ongoing tightening of financial conditions, high oil prices and political uncertainty will likely slow down economic activity in September, they wrote.
Key points of the declaration:
The central bank of India has intensified its efforts to support the rupee. Foreign exchange reserves have been reduced by $ 14 billion due to the intervention of the central bank. This has also brought liquidity out of the market, and along with the growing demand for banknotes among the locals, has led to a contraction of cash in the banking system and has increased borrowing costs.
The yield on 10-year government bonds rose to a three-year high of 7.94 percent in May, while similar maturity rates on the highest corporate bonds rose to 8.70 percent on Monday, the highest since November 2014. On Wednesday, the yield on benchmark 10-year notes rose eight points 7.92 percent, while the rupee was 0.3 percent stronger.
– With the assistance of Manish Modi, Jeanette Rodrigues, Anurag Joshi, Archana Chaudhary and Vrishti Beniwal