India's central bank hikes interest rate to 5.5pc

On Wednesday, India's central bank increased its benchmark repo rate by 25 basis points to 5.5 percent, the first hike in nearly four years, according to <source>. This move was prompted by rising inflation and robust economic growth, as reported by Reuters. The central bank's decision to raise rates comes amid the impact of higher oil prices, driven by the Iran war, which is fueling inflation and reducing purchasing power, affecting currencies.

Additionally, weak monsoon rains due to El Niño have exacerbated price pressures in India's third-largest economy, as stated by the six-member rate panel that unanimously voted for the hike. Governor Sanjay Malhotra indicated in his policy address that the outlook for inflation was no longer benign. Approximately 60 percent of economists in a Reuters poll had anticipated a 25 basis point increase in the repo rate.

In August, consumer inflation accelerated to 4.82 percent, surpassing the Reserve Bank of India's four percent medium-term target for the third consecutive month. The rise in fuel and food prices is now influencing the entire economy, with nearly half of the consumer basket experiencing inflation exceeding four percent. Meanwhile, economic growth remains robust, with the GDP growth for the April-June quarter at 7.8 percent, significantly higher than the central bank's forecast of seven percent.