Key facts
- The Bank of Japan is expected to hike interest rates in June.
- Traders are pricing in an 80% chance of a Bank of Japan rate hike on June 16.
- The US Federal Reserve may abandon its easing bias before the June FOMC meeting.
- The Reserve Bank of India kept its benchmark repo rate at 5.25%.
- The RBI lowered India's GDP growth forecast to 6.6%.
- The RBI raised India's inflation projection to 5.1%.
- The RBI scrapped capital gains tax for foreign bondholders to support the rupee.
- The Indian rupee gained 0.9% against the US dollar, closing at 94.9450.
- The Central Bank of Tunisia maintained its key interest rate at 7.0%.
- The Central Bank of Costa Rica maintained its monetary policy rate at 3.25%.
Global central banks are grappling with a confluence of factors, including geopolitical instability, inflation concerns, and currency fluctuations, leading to varied monetary policy decisions. The Bank of Japan is reportedly poised for an interest rate hike in June, with traders assigning an 80% probability to a June 16 increase, provided there is no significant escalation of Middle East conflict. Concurrently, the US Federal Reserve might shed its easing bias before the upcoming June FOMC meeting, a move expected to bolster the US dollar.
In India, the Reserve Bank of India (RBI) has opted to maintain its benchmark repo rate at 5.25%. However, the central bank has taken steps to support the depreciating rupee, such as eliminating capital gains tax for foreign bondholders. The RBI has also revised its economic outlook, lowering the Gross Domestic Product (GDP) growth forecast to 6.6% for the fiscal year and increasing the inflation projection to 5.1%. RBI Governor Sanjay Malhotra indicated a willingness to act if inflation becomes generalized and stated the bank is prepared to intervene against excessive currency volatility. Surveys suggest Indian households anticipate rising inflation due to geopolitical tensions and monsoon concerns, which could influence future policy. The Indian rupee saw a notable gain of 0.9% against the US dollar, closing at 94.9450, its largest daily increase since April 2, with forward premiums also reaching their lowest point this financial year.
Other central banks are also responding to the prevailing economic climate. The Reserve Bank of Australia (RBA) is monitoring the impact of higher interest rates and a global energy price shock, with Governor Michele Bullock noting that policy tightening is beginning to slow demand, though the full effects are anticipated in one to two years. The New York Federal Reserve's survey revealed that U.S. public inflation expectations remained stable in May, despite Middle East conflict-driven price pressures, though uncertainty over near-term inflation and personal finances increased. The Central Bank of Tunisia maintained its key interest rate at 7.0%, citing external inflationary pressures and geopolitical risks, while its headline Consumer Price Index (CPI) rose to 5.5% in April, with economic growth at 2.6% in Q1 and a narrowing current account deficit. Similarly, the Central Bank of Costa Rica (BCCR) unanimously decided to keep its monetary policy rate at 3.25%, influenced by persistent global uncertainties, particularly concerning the Middle East conflict and oil prices. Inflation in Costa Rica is projected to return to positive territory in the second half of 2026.
RBI Deputy Governor Swaminathan J has cautioned Indian banks about new risks beyond their balance sheets, including those stemming from geopolitics, climate change, and artificial intelligence, emphasizing the need for adaptation despite the Indian financial system's current strength.