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India hikes rates to tame stubbornly high inflation, analysts see more tightening

FILE PHOTO: Reserve Bank of India logo is seen at the gate of its office in New Delhi

By Swati Bhat

MUMBAI (Reuters) - The Reserve Bank of India raised its benchmark repo rate by 50 basis points on Friday, the fourth straight increase, as policymakers extended their battle to tame stubbornly high inflation and analysts said further tightening is on the cards.

The monetary policy committee (MPC), comprising of three members from the RBI and three external members, raised the key lending rate or the repo rate to 5.90% with five out of the six voting in favour of the hike.

The RBI has now raised rates by a total 190 basis points since its first unscheduled mid-meeting hike in May but inflation continues to remain stubbornly high - a phenomenon that is affecting much of the global economy.

Graphics: Another rate hike https://graphics.reuters.com/INDIA-ECONOMY/RATES/xmvjozrodpr/chart.png

"The inflation trajectory remains clouded with uncertainties arising from continuing geopolitical tensions and nervous global financial market sentiments," Governor Shaktikanta Das said in his address accompanying the MPC's decision.

"In this backdrop, MPC was of the view that persistence of high inflation, necessitates further calibrated withdrawal of monetary accommodation to restrain broadening of price pressures, anchor inflation expectations and contain the second round effects," he said.

The MPC also was of the view the current policy rate, adjusted for inflation, was still below 2019 levels.

Most economists expect further tightening, and several predicted the terminal rate at 6.5%, suggesting another 60 bps of rate hikes.

That is well above this month's median Reuters poll forecast at 6.00% in each quarter through end-2023.

"The market was positioned for peak policy rate near 6%, today's 50 bps hike will raise expectations that the peak policy rate is higher than earlier believed. We see peak policy rate at 6.5% now," said Prithviraj Srinivas, chief economist at Axis Capital.

FED ANGST

The U.S. Federal Reserve's relentless and aggressive rate hikes over recent months to curb inflation have battered the rupee, and most other emerging and developed market currencies.

"Clearly, the fast-evolving world order and consistent repricing of Fed's out-sized hikes are strong-arming the emerging markets," said Madhavi Arora, lead economist at Emkay Global Financial Services.

Policymakers around the world are grappling with a sweeping shift away from their respective currencies and into the safe-haven dollar, raising worries of capital outflows and further damage to their economies.

Economists say the RBI too would need to focus on ensuring the interest rate differential is not too low.

Graphics: EM policy rate moves https://graphics.reuters.com/INDIA-ECONOMY/RATES/movanxlnxpa/chart.png

The standing deposit facility rate and the marginal standing facility rate were also increased by the same quantum to 5.65% and 6.15%, respectively

The MPC lowered its GDP growth projection for financial year 2023 to 7% from 7.2% earlier, while its retail inflation forecast was held steady at 6.7%.

India's annual retail inflation rate accelerated to 7% in August, driven by a surge in food prices, and has stayed above the RBI's mandated 2-6% target band for eight consecutive months.

The benchmark 10-year bond yield eased marginally after the RBI's decision to 7.3535% at 07335 GMT while the partially convertible rupee weakened briefly before bouncing to 81.58 per dollar versus 81.86 on Thursday.

The broader NSE Nifty 50 index recovered sharply after a brief fall to trade up 1.65%.

(Reporting by Swati Bhat; Additional reporting Nupur Anand; Editing by Shri Navaratnam)