India’s central bank sticks with inflation fight

Even as it slowed the pace of increase in borrowing costs, the central bank of India pledged to stick with its inflation fight, even as it slowed the pace of increase in borrowing costs in a sign that it is nearing the peak rate.

The Reserve Bank of India s six-member Monetary Policy Committee voted 5 -- 1 to raise the benchmark repurchase rate by 35 basis points to 6.25%, a level last seen in 2018. The rate panel voted 4 -- 2 to stay focused on withdrawal of accommodation, according to Governor Shaktikanta Das.

Inflation in India is expected to moderate and growth in India remains resilient, Das said, announcing the decision through a webcast. After the move, stock prices went down 0.3% and bond yields went up about 5 basis points, perceived as hawkish by some market watchers. The rupee was not changed much.

Today s MPC sounds hawkish, said Marzban Irani, chief investment officer for debt at LIC Mutual Fund Asset Management. The market needs to keep a close watch on global rate hikes and sticky core inflation. The central bank's decision to stick with its accommodation withdrawal stance raises the risk that it might even raise rates into restrictive territory.

Consumer price gains have stayed above the central bank's 2% -- 6% target for more than three straight quarters, as a result of the move. It is not a comfort for a central bank whose primary mandate is to ensure price stability, despite the fact that inflation fell below the 7% level for the first time in three months in October.

The RBI wrote a letter to the government last month, explaining how global factors contributed to its failure. It outlined a roadmap to bring price gains within target.

The growth expectation was lowered to 6.8% from 7% previously seen by the central bank.

Das described the revised growth estimate as evidence of a strong growth impulse.

He said that growth continues to be resilient. Indian policymakers aren't alone in maintaining the hawkish tone. Australia's central bank said on Tuesday that it expects to tighten policy further to cool the hottest inflation in three decades and raised interest rates to a 10 year high.

The step down in magnitude of hikes signals greater comfort with the inflation outlook but not enough to shift gears to neutral, said Rahul Bajoria, an economist at Barclays Plc, referring to the governor's comments on the need for more calibrated action.

Others echoed the view. Emkay Global Services Madhavi Arora said there was space for a more shallow quarter-point hike to reach a neutral rate, while it does not necessarily mean the end of the hiking cycle. In February, Standard Chartered Plc s Anubhuti Sahay believes that there will be another 25 basis points increase.

Governor Das said that while keeping a watchful eye on the changing inflation dynamics and keeping a watchful eye on the current monetary policy actions, we will keep an eye on the evolving inflation dynamics and be prepared to act as necessary as necessary, using the archer from the Indian epic Mahabharata as a metaphor for keeping a hawk eye on risks.

With help from Tomoko Sato, Jeanette Rodrigues, Pradeep Kurup, Devidutta Tripathy, Saket Sundria, Michael Heath, Ronojoy Mazumdar, Subhadip Sircar and Adrija Chatterjee.

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