India Central Bank Hikes Key Rate By 50 Bps For The Third Time In Four Months To Combat Sticky Inflation

The primary policy repo rate of the Reserve Bank of India was hiked by 50 basis points on Friday, for the third time within the present cycle to reduce high inflation that is that has been beyond the central bank’s tolerance limit for six months.

With June retail inflation at 7%, economists surveyed by Reuters had predicted that RBI to raise rates for the third time in four months, but expectations ranged from a 25 basis point increase to a 50 basis point increase. 

The monetary policy committee (MPC) of the central bank increased the repo rate, or key lending rate, to 5.40%.

“Inflation is projected to remain above the upper tolerance level of 6% through the first three quarters of 2022-23, entailing the risk of destabilizing inflation expectations and triggering second-round effects,” the MPC said in its statement.

The rates for the Standing Deposit Facility and the Marginal Standing Facility were raised by the same amount, to 5.15 per cent and 5.65 per cent, respectively.

The RBI surprised markets with a 40 basis point boost at an unexpected meeting in May, followed by a 50 basis point increase in June, but prices have yet to cool.

With inflation remaining high, experts believe that more rate hikes are almost certain in the coming months.

“The RBI today raised the repo rate by 50 bps to 5.40% as we had anticipated, and struck a relatively hawkish tone despite inflation surprising to the downside in recent months,” said Shilan Shah, senior India economist at Capital Economics.

“It’s clear that the tightening cycle still has legs and we expect another 100 bps of hikes by early 2023,” he added.

Food and petroleum price increases have harmed consumer spending and dimmed the near-term prospects for India’s economic growth, which dropped to a year low in the first three months of 2022.

The MPC kept its GDP growth prediction for 2022/23 at 7.2%, while keeping its inflation forecast at 6.7%.

“With growth momentum expected to be resilient despite headwinds from the external sector, monetary policy should persevere further in its stance of withdrawal of accommodation to ensure that inflation moves close to the target of 4% over the medium term while supporting growth,” Governor Shaktikanta Das said in his address.

Das stated that the decision to raise interest rates was unanimous.

Following the RBI’s decision, the benchmark 10-year bond yield increased to 7.25% at 0600 GMT. It had dropped to 7.1073% early on Friday after closing at 7.1566% the day before.

The partially convertible rupee rose marginally to 79.0675 per dollar, up from 79.16 before the policy announcement. In the previous session, the local unit closed at 79.4650.

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