RBI hikes benchmark interest rate by 50 bps to 4.9% to contain inflation

In a development, the Reserve Bank of India (RBI) on Wednesday raised the repo rate - the key lending rate by 50 basis points to 4.90% as inflation continues to remain above its comfort level. Earlier experts had claimed that the Central bank was set to raise the lending rate by 25-50 points to counter the rising inflation. RBI Governor Shaktikanta Das informed that the Monetary Policy Committee (MPC) vote to increase the lending rate was unanimous and has decided to keep its stance on withdrawal from the accommodative set during the pandemic period.

Earlier in May, the RBI had raised the repo rate by 40 basis points to 4.40%, making the current hike the second such rise in a row. The RBI Governor cited the Ukraine war as a reason for the increased inflation. The reverse repo rate was earlier hiked for the first time since August 2018 in May, taking it to 3.75%. 

RBI hikes interest rate 

Reserve Bank of India raised the benchmark lending rate by 50 bps to 4.90% amid rising inflation. The decision to raise the rates was taken by the RBI Governor Shaktikanta Das-headed Monetary Policy Committee (MPC), during its deliberations that started on Monday. The Governor held a press briefing at 10 am on Wednesday, where he announced the new rates.

Earlier, Das had already indicated yet another hike in the repo rate. However, he refrained from quantifying it since further deliberations were going on. It is pertinent to note that the Consumer Price Index (CPI) based inflation, which RBI considers while quantifying the monetary policy, has been on the rise since October 2021. Retail inflation continued to remain above RBI's tolerance level of 2% to 6%, which it crossed back in January.

The retail inflation rate had jumped to an 8-year high of 7.79 per cent in April, exceeding the tolerance level for the fourth month in a row. Meanwhile, experts claim that the rates will continue to remain high in the near future. The Central government has now tasked the RBI to ensure the retail inflation rates remain at 4% with a margin of 2% on either side.

Last month, RBI Governor Shaktikanta Das backed the MPC's decision to raise the lending rates by noting that the decision was taken in view of the impact suffered by the Indian economy. He had said that the rising inflation, geopolitical tensions, high crude oil prices and shortage of commodities globally led to the decision. Das had stated that India was “not an island in this globally connected world” while explaining the MPC's decision to raise the lending rates. It is pertinent to note that the RBI in April had stated that inflation was expected to rise to 5.7% for the financial year due to escalating geopolitical tensions.

Announcing the decisions taken at the MPC meeting held from June 6-8, RBI Governor Shaktikanta Das informed that the standing deposit facility - the SDF rate - stands adjusted to 4.65% and the marginal standing facility - MSF rate and bank rate - to 5.15%.

GDP growth in 2021-22 stands at 8.7%

Furthermore, the Governor also informed that India’s GDP estimate also jumped. “According to the provisional estimates released by the National Statistical Office on May 31st, India's GDP growth in 2021-22 stood at 8.7%. This level of real GDP in 2021-22 has exceeded the pre-pandemic, i.e., 2019-20 level,” Governor Das said. 

Explaining the MPC vote to raise the lending rate, the RBI Governor said that the process of economic recovery continues to get affected due to the increased inflation. He stated that inflation is likely to remain over the upper tolerance band. “Real GDP growth for FY 2022-23 has been retained at 7.2%. In April 2022, inflation has further increased to 7.8%,” Governor Das stated. 

Meanwhile, he further added that the RBI will continue to work proactively towards normal monetary conditions after the economic damage caused by the pandemic. The Governor noted that the urban demand is recovering, while rural demand is gradually improving as well. Further speaking on the projected inflation, Das said, “with the assumption of a normal monsoon, in 2022 and average crude oil price in the Indian basket of 105 dollars per barrel, inflation is now projected at 6.7% in 2022-23.”
 

Image: RBI