India central bank hikes rates 25 bps as expected, hints at more tightening

THE Reserve Bank of India (RBI) hiked its key repo rate by 25 basis points on Wednesday (Feb 8) as expected but surprised markets by leaving the door open to more tightening, saying core inflation remained high.

The central bank said that its policy stance remains focused on the withdrawal of accommodation.

Most analysts had expected a hike on Wednesday to be the final increase in the RBI’s current tightening cycle, which has seen it raise rates by 250 bps since May last year.

The monetary policy committee (MPC), comprising three members from the central bank and three external members, raised the key lending rate or the repo rate to 6.50 per cent in a split decision.

Four of the six members voted in favour of the decision.

“The global economic outlook does not look as grim now as it did a few months ago. Growth prospects in major economies have improved, while inflation is on a descent though still remains well above target in major economies. The situation remains fluid and uncertain,” RBI governor Shaktikanta Das said while announcing the Monetary Policy Committee’s rate decision.

In a poll conducted ahead of the federal budget on Feb 1, more than three-quarters of economists, 40 of 52, had expected the RBI to raise the repo rate by 25 bps. The remaining 12 predicted no change.

The annual retail inflation rate eased to 5.72 per cent in December from 5.88 per cent in the previous month, falling below the RBI’s upper tolerance band of 2-6 per cent for a second straight month.

But Das said core inflation remains elevated, and that further calibrated policy action was warranted.

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“The stickiness of core or underlying inflation is a matter of concern. We need to see a decisive moderation in inflation,” he said.

The Indian rupee slightly extended gains against the US dollar after the rate decision. It firmed to 82.62 to the dollar from 82.67 before the announcement.

Meanwhile, bond yields also inched up with the benchmark bond yield rising to 7.3554 per cent, from 7.3124 per cent before the policy decision and the previous close of 7.3102 per cent.

The Nifty 50 share index was up 0.72 per cent to 17,849.85 as of 10.06 am IST, while the S&P BSE Sensex rose 0.68 per cent to 60,695.09. REUTERS