Central bank announced a 50 bps hike in the benchmark repo rate to 5.9% on Friday

As expected, the central bank of India announced on Friday that it would raise its repo rate by 50 basis points to 5.9%. The announcement was made by RBI governor Shakhtikantha Das, who also warned of “an unusual global geopolitical situation”.

After the Monetary Policy Committee meeting, Das said the RBI projected inflation-adjusted GDP growth of 7% for fiscal 2022-23, which was lower than the previous 7.2%, Das said. GDP growth is projected to be 6.3% in the second quarter of 2022-2023, 4.6% in the third quarter, and 4.6% in the fourth quarter.

Inflation is hovering around 7% and the RBI expects it to remain around 6% in the second half of the fiscal year, Das added.

Central banks in developed and emerging economies are raising interest rates almost simultaneously to quell inflation amid the Ukraine war, rising energy prices and ongoing supply chain disruption.

Central banks reduce the economy’s money supply, usually by raising the base repo rate (the rate at which commercial banks borrow money by selling securities to the Reserve Bank).

Countries from the US to Europe to India are aggressively raising lending rates with the goal of lowering inflation by curbing the supply of cheap money. However, such monetary tightening comes with a cost. It stifles investment, sacrifices jobs, and stifles growth. This is a compromise faced by most countries, including India.

Das quoted Mahatma Gandhi as saying, “We are grateful, we are always vigilant, we always try.” He noted that inflation risks persist for Asia’s third-largest economy. “Global geopolitical conditions are having a major impact on domestic inflation. Rapid import inflation pressures have eased, but food and fuel prices are still rising.”

The RBI raised rates by 40 basis points for the first time at an unscheduled meeting in May, followed by 50 basis points in June and 50 basis points in August. The reference point is one hundredth of a percentage point.

Das said there is an “upside risk” for food prices, and while grain price pressure has spread from wheat to rice, sowing less soybeans could also put some pressure on it. “These risks to food inflation have a negative impact on inflation expectations,” he said, warning of the so-called “secondary effects,” meaning ripple effects.

“India is in a better position than many economies, but the secondary effect is exacerbated if high inflation is maintained.”

The RBI governor said that “maintaining macroeconomic stability” is paramount.

On September 16, the World Bank warned of a possible recession in 2023. World Bank President David Malpass said in a statement: “It is deeply concerned that this trend could continue and could have devastating consequences for people in emerging markets and developing countries.”

The Fed’s relentless tightening of monetary policy to control inflation has boosted the value of the dollar and bond yields, damaging other currencies, including the rupee.

The strength of the dollar devalued the rupee. The RBI has intervened in the market to maintain the national currency by selling dollars from India’s foreign exchange reserves.

“The appreciation of the dollar and fluctuations in valuations driven by higher bond yields have reduced our reserves by 67%. Market intervention will continue to be prudent,” Das said. He hinted that the RBI would take a measured approach to the point of defending Luffy.

On September 23, the country’s valuable foreign exchange reserves stood at $537.5 billion.

Das said the current account deficit (CAD) equivalent to 2.8% of GDP in the first quarter and a trade deficit of 8.1% “weakened global growth and consequently the trade deficit remains high”.

CAD represents the difference between how much India spends in the rest of the world and what it earns in the rest of the world.

The RBI governor said remittances rose 22.6% while exports of services remained strong, growing 35.4% in the April-June period. This net surplus in services exports will partially offset the trade deficit, he said.

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