Ukraine war has led to globalisation of inflation, says RBI governor

The Reserve Bank of India (RBI) has raised key lending rate by 50 basis points to 4.9%, Shaktikanta Das announced, adding that the MPC is focused on withdrawal of accommodation.

Wednesday's increase follows a 40-bps rise in early May at an unscheduled meeting that kicked off the central bank's tightening cycle, which economists expect to be relatively short.

The Standing Deposit Facility rate and the Marginal Standing Facility Rate were adjusted higher by the same quantum to 4.65% and 5.15%, respectively.

Raising the inflation forecast to above the tolerance band at 6.7% for the current financial year, RBI governor Shakikanta Das said the Ukraine war has worsened supply chain problems.

He said inflation will likely remain above the RBI's upper tolerance band in the first three quarters of the financial year that started on April 1.

The war in Ukraine is lingering and India is facing new challenges everyday, accentuating supply chain problems, Das said. The war has led to globalisation of inflation, he said.

Inflation has steeply increased much beyond the upper tolerance level. A large part of the rise in inflation is primarily attributed to a series of supply shocks linked to the war," Das said, adding that the central bank has started a gradual and orderly withdrawal of extraordinary accommodation instituted during the pandemic.

Consumer prices continued to rise in April as inflation galloped to eight-year high of 7.8%. Wholesale prices have gained too at the fastest pace in over three decades, adding pressure on businesses to pass on high costs to consumers.

The RBI governor said the emerging markets are facing bigger challenges from increased market turbulence, monetary policy shifts in advanced economies and their spillovers.

"The process of economic recovery in emerging market economies is also getting affected," he added.

The price spikes have hammered consumer spending and darkened the near-term outlook for India's economic growth, which slowed to the lowest in a year in the first three months of 2022.

India's central bank maintained its growth projection at 7.2% for FY23.

The central bank had slashed the repo rate by a total of 115 bps since March 2020 to soften the blow from the Covid-19 crisis.