India’s central bank holds benchmark policy rates as Iran war raises inflation risks
Sign of the Reserve Bank of India (RBI) in Mumbai, India, on Friday, April 5, 2024.
Dhiraj Singh | Bloomberg | Getty Images
India’s central bank kept benchmark interest rates at 5.25% on Wednesday; because strong growth provides the opportunity to keep policy tight at a time when the Iran war increases the risk of inflation.
Economists polled by Reuters had predicted that the policy rate would remain unchanged.
The monetary policy committee considers the intensity and duration of the conflict, as well as damage to energy and other infrastructure, to pose “risks to the U.S. economy.” [India’s] Inflation and growth,” Reserve Bank of India Governor Sanjay Malhotra said in a statement.
India’s consumer inflation rose to 3.21% in February for the fourth consecutive month, from 2.75% in the previous month. While the country posted sharp growth in the December quarter, growing 7.8% faster than expected, the Iran war threatens to slow growth.
India’s Chief Economic Adviser V. Anantha Nageswaran had also warned last month that the growth forecast of 7.0% to 7.4% for the fiscal year ending March 2027 faces “significant downside” risk due to rising energy costs and supply chain disruptions linked to the Iran war.
Nageswaran said the conflict in the Middle East will disrupt the supply of essential commodities such as oil, gas and fertilizer, increase import prices and increase logistics costs, which will have an impact on both growth and inflation.
The conflict, which began on February 28 following US and Israeli attacks on Iran, is disrupting the movement of goods in the Strait of Hormuz, a critical waterway that carries 20% of global oil, increasing energy and shipping costs and straining supply chains.
In a temporary relief, the United States and Iran agreed to a ceasefire earlier in the day, and Tehran said safe passage of ships for the next two weeks was “possible” in coordination with the country’s armed forces.
Citing growth concerns, the HSBC Purchasing Managers Index compiled by S&P Global showed that India’s private sector activity slowed to its lowest level since October 2022 in March. Companies surveyed said the Middle East war, unstable market conditions and inflationary pressures “reduced growth.”
