RBI raises benchmark repo rate by 50 basis points to 4.90% amid rising inflation
As widely anticipated, the Reserve Bank of India (RBI) on Wednesday raised the benchmark repo rate by 50 basis points to 4.90% to tamp down rising inflation, governor Shaktikanta Das announced.
At the end of its three-day monetary policy committee (MPC) meeting, the central bank also said it saw inflation higher at 6.7% for the current fiscal year from 5.7% projected earlier, while retaining gross domestic product (GDP) growth at 7.2% for 2022-23.
In a surprise off-cycle meet last month, the central bank hiked the repo rate by 40 basis points to 4.49%. One basis point is one-hundredth of a percentage point.
The aggressive stance of the RBI comes amid a grim prognosis of geo-political uncertainties over the grinding war in Ukraine, continuing supply-chain disruptions, and rising energy and food prices. Consumer prices accelerated to an eight-year high of nearly 7.8% in April, according to official data.
The MPC sees clear risks from runaway prices to the economy. “The Ukraine war has led to globalisation of inflation,” Das said. Emerging economies, such as India, were facing “bigger challenges” because of shifting monetary policies of advanced economies, which were impacting markets, he added. The MPC noted that inflation risk has intensified further.
The two successive rate hikes point to a clear withdrawal of the RBI’s accommodative policies to fuel growth. The central bank slashed the repo rate in March 2020 to push nascent economic recovery after the impact of the Covid pandemic.
The RBI kept two benchmark economywide interest rates unchanged at record lows for almost two years before increasing them on May 4, 2022, a signal that the central bank at the time continued to prioritise growth recovery despite inflationary winds sweeping the world.
The repo rate refers to the rate at which commercial banks borrow money by selling their securities to the Reserve Bank, while the reverse repo rate is the rate at which the central bank borrows money.
These rates are key to boosting credit and investments by businesses. The MPC’s review of the economy is critical for markets and general business sentiment.
The forecast of a normal monsoon will help to ease inflation concerns, the RBI governor said, adding that the repo rate still remained below pre-pandemic levels.
According to the MPC, inflation is likely to remain above 6% in the first three quarters of the current fiscal. “Our steps will be calibrated, focussed on bringing down inflation to the target level,” Das said.
Under Indian laws, if inflation hovers above 6% for three straight quarters, the RBI must explain to the government the reasons for failing to meet its inflation target and recommend remedial actions.
“The June policy was a continuation of the off-cycle policy with the focus remaining squarely on inflation,” said Suvodeep Rakshit, senior economist at Kotak Institutional Securities.