India’s central bank keeps benchmark rates steady, cites ‘moderate’ core

India’s central bank on Wednesday held interest rates at 5.25% for a fifth time in a row, even as the country’s retail inflation has crossed the Reserve Bank of India’s medium-term target of 4%.

Economists polled by Reuters had forecast the policy rate would remain unchanged.

The central bank noted that headline inflation had “edged up above target as expected,” but core inflation, excluding precious metals, continues to “remain moderate.” Core Inflation is expected to decline after peaking in the December quarter, Sanjay Malhotra, RBI governor, said in his address on Wednesday.

He added that greater clarity needs to emerge on inflation about “its path, and composition before taking any policy action. Future rate action would also have to “consider the need for recalibration of policy rates in line with the evolving growth-inflation dynamics,” Malhotra said.

Several Asian countries including Japan, the Philippines, Indonesia, and South Korea have raised interest rates in the past few months to curb inflation as the conflict in the Middle East has driven energy prices higher.

Malhotra also cautioned that even though growth has been “resilient,” it is expected to be lower in this financial year. The outlook is “hazy” on the back of the uncertainties from the southwest monsoon, El Nino, geopolitics, and global trade policy, he said.

India’s benchmark Nifty 50 index was trading flat, while 10-year bond yields fell about 4 basis points to 6.782%.

The country’s consumer inflation touched an 18-month high of 4.38% in June, as oil prices surged. Since May, the government has partially passed on the fuel price increases to the public, adding to cost pressures.

The Indian central bank, however, has repeatedly emphasized that its focus is on core inflation — which excludes energy and food prices. It was at 3.7% at the end of April, and is expected to climb up to 4.7% in the financial year ending March 2027.

Higher inflation is mostly on account of fuel and food, with little signs of widespread price pressures so far, Malhotra said Wednesday.

But a prolonged rise in energy prices could lift core inflation as well through higher input, transportation, and operational costs.

Inflation is expected to stay above 5% for eight months starting October, HSBC Global Investment Research said in a report on Monday.

“That’s a level that will be difficult for both the RBI and markets to overlook,” it said, adding that it expects the central bank to raise rates in October and December by 25 basis points each.

India, the world’s…