India raises interest rates to 5.4%, third hike since May

NEW DELHI — India’s central bank on Friday raised its key interest rate by 50 basis points to 5.4% for the third time since May as it focuses on curbing inflation.

Reserve Bank of India Governor Shaktikanta Das forecasts inflation at 6.7% for the current financial year. June was the sixth straight month of inflation above the central bank’s acceptable level of 6%, he said in a statement after the central bank’s supervisory committee meeting.

The committee “decided to remain focused on withdrawing easing to ensure that inflation stays within target going forward while supporting growth,” he said.

Das said the combined effects of tightening global monetary policy and the war in Ukraine are deteriorating global economic and financial conditions, increasing the risk of a recession.

The Indian rupee plunged to an all-time low of 79.05 rupees to the dollar. Das attributes the weakness to the dollar’s strength as interest rates rise in the United States.

Multiple waves of the COVID-19 outbreak have hit India’s large informal sector and contact-intensive services such as restaurants, hotels, retail and tourism hard.

The unemployment rate has risen to nearly 8%, according to data from the think-tank Center for Economic Monitoring of India.

The main opposition parliamentary party on Friday organized marches across the country in protest against higher prices for petrol, gas, food and goods and service taxes.

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People shop at a wholesale market in Mumbai, India on August 5, 2022. (Rajanish Kakade/AP Photo)

Indian Finance Minister Nirmala Sitharaman defended the government’s handling of the economy in parliament earlier this week. She said there was zero chance of India going into recession.

On Friday, Das forecast that the economy would expand at an annual pace of 7.2% in the current fiscal year ending March 2023, before slowing to 6.7% in the next fiscal year.

“Regarding growth prospects, rural consumption is expected to benefit from a brighter agricultural outlook,” he said. Demand should boost discretionary spending and urban consumption, he said.

With inflation remaining above target, Capital Economics’ Silang Shah said in a note that “clearly there is still a leg to the tightening cycle” and a 1 percentage point hike by early next year. expected to be expected.

The International Monetary Fund forecasts India’s economic growth of 7.4% in 2022 from 8.7% in 2021, falling to 6.1% in 2023.

The IMF said on Thursday that India will gradually withdraw fiscal and monetary policy stimulus, develop better infrastructure for exports such as ports and railways, and sign free trade agreements with major trading partners. In the medium term, he proposed to expand shipments to keep the economy in balance.

Ashok Sharma

Associated Press