Inflation has been ruling above the RBI’s comfort level of 6% since January 2022 and the RBI governor expects that trend to continue.
The Reserve Bank of India hiked its key lending rate by 50 basis points to pre-pandemic levels of 5.40 percent today, a third increase in a row to tame surging inflation which has remained above the upper end of the central bank’s target this year.
With June retail inflation at 7.00%, well above the RBI’s 2-6 % medium-term target, the monetary policy committee (MPC) raised the key lending rate or the repo rate by 50 basis points (bps) to 5.40%, the highest since 2019.
With the latest surge, the repo rate, or the short-term lending rate at which banks borrow crossed the pre-pandemic level of 5.15 %.
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All six members of the Monetary Policy Committee (MPC), led by RBI Governor Shaktikanta Das, unanimously voted for the rate hike.
The central bank had caught markets off guard with a 40 bps hike at an unscheduled meeting earlier in May this year, followed by a 50 bps hike in June, but prices have shown little signs of cooling so far.
Mr. Das weighed in on the dilemma the RBI faces, with pressing economic concerns to be addressed. Retail inflation, based on the Consumer Price Index (CPI), which RBI factors in while fixing its benchmark rate, stood at 7.01 % in June.
Inflation has been ruling above the RBI’s comfort level of 6% since January 2022 and the RBI governor expects that trend to continue.
Inflation based on the Wholesale Price Index (WPI) stuck to double-digit for 15 months in a row. The WPI reading was at 15.18 % in June.
The latest RBI action follows the Bank of England hiking rate by 50 basis points, the highest surge in 27 years, to 1.75 %.
Earlier in July, the US Federal Reserve effected its second consecutive 0.75 percentage point interest rate increase, taking its benchmark rate to a range of 2.25-2.5 %.
Traders now wait for the RBI governor’s comments on the outlook and any clues on the pace of tightening going ahead.
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