RBI hikes benchmark lending rate by 50 basis points for 4th time in a row to rein in inflation

RBI hikes benchmark lending rate by 50 basis points for 4th time in a row to rein in inflation

With the latest hike, the repo rate or the short term lending rate at which banks borrow from the central bank is now close to 6 per cent.

AgenciesUpdated: Friday, September 30, 2022, 11:47 PM IST
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RBI’s Monetary Policy Committee raises Repo Rate by 50 bps | Photo: Pixabay

Mumbai: The Reserve Bank of India (RBI) on Friday retained its inflation projection for FY23 at 6.7% amid geopolitical concerns triggered by the Russian invasion of Ukraine and raised key repo – the rate at which it lends short-term money to banks – by another 50 basis points (one basis point is one hundredth of a percentage point) to 5.90% with immediate effect.

The central bank only expects inflation to come under control from January 2023. It is mandated by law to keep retail inflation in a band of 2-6%, but inflation has remained above the upper limit since January 2022. It ruled over 7% in April, May and June. July saw a breather with inflation sliding to 6.7%, but in August it again touched 7%.

The RBI has raised repo rate by 190 basis points or 1.90% since May. The rate is now at its highest level since April 2019. The U.S. Federal Reserve and advanced European economies, too, have sharply raised interest rates to fight soaring inflation, mainly triggered by supply side woes on account of the war in Ukraine.

Experts said the MPC's future rate actions will be determined by domestic inflation. “Domestic inflation is still above the RBI's upper tolerance limit and faces pressure from food and core inflation,” credit rating agency Crisil Ltd said. “Against this backdrop, we expect the MPC's future actions to be determined largely by the trajectory of domestic inflation. Developments in the external sector and monetary policy actions of other central banks will also influence its decision.”

According to HDFC Bank, the RBI is expected to continue with its rate hikes in the upcoming policies taking rates up to 6.5 per cent (terminal rate) by the end of the fiscal year.

Describing the MPC decision as ‘on expected lines’, Bank of Baroda, in a report, “Our terminal repo forecast stands at 6.5%, thus a rate hike of another 50-60 bps in the current cycle seems feasible.”

The rupee extended its initial gains and settled 33 paise higher at 81.40 against the U.S. dollar on Friday. At the interbank forex market, the currency opened at 81.60 against the greenback. It witnessed an intra-day high of 81.17 and a low of 81.69 during the session. It ended at 81.40, up 33p from its previous close.

Equity indices made an emphatic comeback after falling for seven straight sessions. The recovery in the rupee added to the momentum. Overcoming a wobbly start, the 30-share BSE Sensex soared 1,016.96 points or 1.80% to settle at 57,426.92. During the day, it rallied 1,312.67 points or 2.32% to 57,722.63. The broader NSE Nifty climbed 276.25 points or 1.64% to end at 17,094.35.

At the beginning of this fiscal year, pressures due to imported inflation were acute. They have eased, but inflation remains at elevated levels across food and energy items, RBI Governor Shaktikanta Das said while unveiling the outcome of the meeting of the bank’s six-member Monetary Policy Committee (MPC). Five of the six members of the MPC voted in favour of the hike.

With services activity showing a strong rebound and some improvement in pricing power, risks of higher pass-through of input costs do remain, the Governor said. “Taking into account these factors, the inflation projection is retained at 6.7% in 2022-23, with Q2 at 7.1%; Q3 at 6.5%; and Q4 at 5.8%, with risks evenly balanced,” he said.

Inflation based on the Consumer Price Index (CPI) is projected to reduce to 5% in the first quarter of the next fiscal year beginning April 2023. The RBI governor said India faces upside risks to food prices and underlined that cereal price pressure is spreading from wheat to rice in anticipation of lower kharif paddy output.

“The lower sowing for kharif pulses could also cause some pressures,” he said. “Delayed withdrawal of the monsoon and intense rain spells in various regions has already started to impact vegetable prices, especially tomatoes. These risks to food inflation could have an adverse impact on inflation expectations.”

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