India’s RBI says early rate hikes needed to control inflation and protect growth

A Reserve Bank of India (RBI) logo is seen at the entrance to its office in New Delhi, India November 9, 2018. REUTERS/Altaf Hussain

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MUMBAI, Sept 16 (Reuters) – The Reserve Bank of India said on Friday it will need to accelerate monetary policy to tackle persistent inflation and protect medium-term growth in the world’s fifth-largest economy.

Inflation in India has remained above the apex bank’s tolerance level since January, prompting it to raise interest rates by a total of 140 basis points in the current cycle. The bank is expected to raise another 25 to 50 basis points at its next meeting at the end of this month.

“At this critical juncture, monetary policy must act as a nominal anchor to the economy as it charts a new growth path,” the RBI said in an article on the state of the economy included in its monthly newsletter.

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“Anticipation of monetary policy actions can keep inflation expectations firmly anchored and reduce the medium-term growth sacrifice.”

The RBI said the August 2022 inflation reading of 7% was in line with its forecast that inflation peaked in April and will reluctantly decline over time. Read more

There has, however, been a resurgence in food price pressures, mainly from grains, although fuel and essential components such as transport and manufacturing have provided modest respite, the bank said.

“We maintain our view that inflation dynamics should ease in the third quarter and turn slightly negative in the fourth quarter. With favorable base effects in the second half of 2022-23, inflation is expected to moderate, although upside risks are in the air.”

Overall demand in India is firm and poised to expand further as the festival season sets in, while domestic financial conditions continue to support growth impulses, the RBI said.

It also projects that the country’s current account deficit will remain below 3% of gross domestic product in the current fiscal year until March 2023.

“With portfolio flows returning and foreign direct investment remaining strong, this deficit order is perfectly fundable,” he said.

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Reporting by Swati Bhat; Editing by Devika Syamnath

Our standards: The Thomson Reuters Trust Principles.

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