Economy: To curb inflation, RBI hikes the repo rate by 50 bps to 5.40%
Mumbai: To curb inflation, the Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday announced a 50 basis point hike in the repo rate to 5.40 percent, citing continued upside risks to inflation.
With this fresh move, the central bank has entirely reversed the Covid-19 era curbs.
The RBI has retained its Consumer Price Index (CPI) inflation forecast of 6.7 percent for the current financial year, with risks evenly balanced.
The Standing Deposit Facility (SDF) rate, or the lower band of the interest rate, is now at 5.15 percent. In contrast, the Marginal Standing Facility (MSF), the higher rate corridor, stands at 5.65 percent.
The benchmark policy repo rate has now been the highest since August 2019.
As it did in its June 2022 policy statement, the MPC said they focused it on the withdrawal of accommodation granted during the pandemic-related lockdowns.
Friday’s repo rate hike takes the total since May to 140 basis points. With the introduction of the SDF at a higher rate than the reverse repo rate in April, effective rate hikes now stand at 180 bps so far in 2022.
“Spill-overs from geopolitical shocks are imparting considerable uncertainty to the inflation trajectory. More recently, food and metal prices have come off their peaks,” the MPC said in a statement.
“International crude oil prices have eased in recent weeks but remain elevated and volatile on supply concerns even as the global demand outlook is weakening. The appreciation of the US dollar can feed into imported inflation pressures.”
The CPI inflation has remained above the upper band of the RBI’s mandated 2-6 percent range for six straight months up to June 2022.
The June inflation print was at 7.01 percent. The RBI’s medium-term target for CPI inflation is 4 percent.
Upside risks to domestic inflation increased significantly after Russia’s invasion of Ukraine on February 24, which led to a sharp rise in global commodity prices.
The CPI forecast assumes the average price of crude oil for the Indian basket at USD 105 per barrel. The CPI inflation is seen at 7.1 percent in July-September, 6.4 percent in October-December, and 5.8 percent in January-March 2023. The price gauge is seen at 5 percent in the first quarter of 2023-24.
The MPC on Friday retained the real GDP growth forecast of 7.2 percent for the current financial year (2022-23). The GDP growth for the first quarter of the next financial year is seen at 6.7 percent.
Following the Friday move, bond prices fell sharply, with the yield on the 10-year benchmark bond climbing ten basis points to 7.26 percent. The bond market had hoped for a rate hike of 35 bps along with signals that the RBI may temper future rate hikes. The Indian rupee appreciated sharply versus the US dollar, at 79.07 per dollar, compared to 79.47 per dollar at the previous close on Thursday.
(VP)
