Interest Rate Increase by the Reserve Bank of India
The Reserve Bank of India has decided to raise interest rates due to the effects of the Iran war. The central bank increased the repo rate applied to loans given to commercial banks to 5.50%, marking a quarter-point increase. This decision was unanimously approved by all six members of the monetary policy committee.
Inflation and Economic Growth
India has acted alongside other central banks that are tightening policies to control inflation and support their currencies. Following the outbreak of the war, the central bank had kept interest rates steady to assess the impact of fluctuations in oil prices on the country’s growing economy. However, strong economic growth in the last quarter allowed for a focus on price increases.
Consumer Price Inflation
In August, consumer price inflation rose to 4.82%, exceeding the central bank’s medium-term target of 4% for the third consecutive month. Data shows that price pressures are no longer limited to food and transportation.
Value of the Rupee and Foreign Investments
The depreciation of the rupee is also on the central bank’s agenda. Various measures have been taken to support the rupee, which has recently been hovering near historic lows, including a deposit program that Indians living abroad can participate in. This program attracted approximately $127 billion (113 billion Euros) in investments. However, the continued selling of Indian stocks by foreign investors and oil prices hovering around $100 have put the rupee under renewed pressure.
Energy Prices and Import Bill
As the world’s third-largest oil importer, India typically sources half of its crude oil through the Strait of Hormuz. However, this route has nearly closed since the war began. Analysts indicate that India is one of the economies most exposed to global energy shocks. High oil and fertilizer prices are increasing the country’s import bill.