By Swati Bhat and Chris Thomas
MUMBAI (Reuters) – The Reserve Bank of India’s key policy repo rate was raised by 50 basis points on Friday, the third increase in the current cycle to cool stubbornly high inflation that has remained above the central bank’s tolerance band for six straight months.
With June retail inflation hitting 7%, economists polled by Reuters had expected the third rate hike in as many months, but views were widely split between a 25 bps to a 50 bps increase.
The monetary policy committee (MPC) raised the key lending rate or the repo 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 destabilising inflation expectations and triggering second round effects,” the MPC said in its statement.
The Standing Deposit Facility rate and the Marginal Standing Facility Rate were adjusted higher by the same quantum to 5.15% and 5.65%, respectively.
The RBI caught markets off guard with a 40 bps hike at an unscheduled meeting in May, followed by a 50 bps increase in June, but prices have shown little sign of cooling off yet.
With inflation staying elevated more rate hikes in coming months are all but inevitable, economists say.
“Expect the RBI to take the repo rate to 5.75% in this cycle,” said Sakshi Gupta, principal economist at HDFC Bank in Gurugram.
The price spikes have hammered consumer spending and darkened the near-term outlook for India’s economic growth, which slowed to the lowest in a year in the first three months of 2022.
The MPC retained its GDP growth projection for 2022/23 at 7.2% while its inflation forecast remained unchanged at 6.7%.
The MPC believes “calibrated withdrawal of monetary policy accommodation is warranted to keep inflation expectations anchored and contain the second round effects,” Governor Shaktikanta Das said while announcing the policy decision.
Das said the decision to increase rates was a unanimous one.
The benchmark 10-year bond yield climbed after the RBI’s decision and was at 7.2439% at 0524 GMT. It had declined to 7.1073% earlier on Friday after ending at 7.1516% on Thursday.
The partially convertible rupee firmed slightly to 79.08 per dollar, from 79.16 prior to the policy decision. The local unit had closed at 79.4650 in the previous session.
Source:reuters