India’s central bank unexpectedly raised its key key rate on Wednesday, pushing bond yields higher as it intensified its fight against inflation that beat expectations for much of the year.
In its first unplanned rate change since the low point of the pandemic, the Reserve Bank of India raised its repurchase rate to 4.40%, from the record low of 4% it’s held for the past two years to support the economy.
Ongoing inflationary pressures are becoming more acute, Governor Shaktikanta Das said in an online briefing, adding that there is a risk that prices will remain at these levels “too long” and expectations have become unanchored. The bank’s next scheduled rate decision is not until June 8.
RBI policymakers have recently begun to signal that higher rates are in the works as consumer prices have crossed the upper bound of the bank’s target until the first quarter of 2022.
The move also comes ahead of Wednesday’s Federal Reserve rate decision, which is expected to be the US central bank’s most aggressive move to fight inflation in decades.
Rises in fuel and food prices, exacerbated by the Russian invasion of Ukraine and ongoing pandemic-related supply chain disruptions, have run hotter than the RBI had anticipated for much of this year. Headline inflation rose to a 17-month high of 6.95% in March, leaving the RBI above the RBI’s 2%-6% target for a third month.
After reaffirming its accommodative stance in February — a move criticized by some economists as too benign because of the risk of rising prices — the central bank said last month it would prioritize inflation over supporting growth.
Since that pivot, traders have started pricing in the most aggressive rate hikes in the region. Yields on the 10-year benchmark bond rose a whopping 28 basis points as Das spoke.
“Inflation risks justify a more aggressive and earlier monetary policy tightening,” said Nathan Sribalasundaram, India rates analyst at Nomura Holdings Inc. in Singapore, for the briefing.
In an interview late last month, Jayanth Rama Varma, one of the most aggressive members of the RBI’s rate-setting committee, indicated that the bank was ready to raise borrowing costs. “All the foundations have been laid,” he says. “Liquidity normalization has taken place, forward guidance has been removed, we are now completely free to trade.”
Another member of the Monetary Policy Committee, Shashanka Bhide, said in a separate interview that policymakers were “a little surprised” by the rise in food prices.
The RBI in April raised its inflation forecast to 5.7% for the fiscal year starting April 1, from 4.5% in February, and said gross domestic product would grow 7.2% for the year, compared with a previous expectation of 7.8. †