Key facts
- India's central bank is expected to hold interest rates steady this week, according to a Reuters poll of economists.
- Retail inflation in India rose to 4.38% in June, exceeding the central bank's 4% target for the first time in 17 months.
- Core inflation, excluding food and fuel, remains near 4%.
- Wholesale inflation increased to 9.87% in June.
- Several central banks globally have raised rates, while the U.S. Federal Reserve and Bank of Japan have maintained their current rates.
- Measures taken by the RBI to support the rupee have attracted nearly $40 billion in foreign inflows.
India's central bank is widely expected to maintain its benchmark interest rates at current levels this week, a stance that diverges from many of its global counterparts that have been raising borrowing costs. This decision comes despite a recent uptick in inflation and pressure on the rupee, as the Reserve Bank of India (RBI) believes inflation remains within its comfort zone and has successfully attracted significant foreign inflows through alternative measures.
While retail inflation in India reached 4.38% in June, it remains within the central bank's 2%-6% tolerance band. Core inflation, which excludes volatile food and fuel prices, has stayed near 4%. However, wholesale inflation has climbed, and inflation expectations are rising, suggesting potential future price pressures. Economists anticipate the RBI may adopt a more hawkish tone in its communication, acknowledging these risks while maintaining a data-dependent approach and a neutral policy stance.
Globally, several central banks, including those in Europe, Australia, Indonesia, and South Africa, have increased their benchmark borrowing costs in response to inflation. The U.S. Federal Reserve and the Bank of Japan, however, have kept their rates unchanged. The RBI's decision to hold rates steady is partly attributed to its success in attracting nearly $40 billion in foreign inflows through measures like scrapping capital-gains tax for foreign bondholders, rather than resorting to rate hikes to defend the rupee.