RBI raises interest rate for 2nd straight month to tame inflation, loans to get costlier

RBI holds rates steady as widely expected
A security guard's reflection is seen next to the logo of the Reserve Bank Of India (RBI) at the RBI headquarters in Mumbai, India, June 6, 2019. Reuters/Francis Mascarenhas/File Photo

Mumbai: The Reserve Bank of India's key interest rate was raised by 50 basis points on Wednesday as widely expected, in the second hike in as many months, in a bid to cool persistently high inflation.

The monetary policy committee (MPC) raised the key lending rate or the repo rate by 50 basis points (bps) to 4.90%.

The Standing Deposit Facility rate and the Marginal Standing Facility Rate were adjusted higher by the same quantum to 4.65% and 5.15%, respectively.

RBI Governor Shaktikanta Das had said a June 8 move was a "no brainer". But analysts polled by Reuters had been divided over how much it would hike, with forecasts ranging between 25 and 75 bps.

Wednesday's increase follows a 40-bps rise in early May at an unscheduled meeting that kicked off the central bank's tightening cycle, which economists expect to be relatively short.

"Upside risks to inflation as highlighted in last policy meetings have materialized earlier than expected," Das said after the policy decision.

He said inflation will likely remain above the RBI's upper tolerance band in the first three quarters of the financial year that started on April 1.

Retail inflation in April accelerated to 7.79% from a year earlier, above the RBI's tolerance band for inflation of 2% to 6% for a fourth month in a row, and a further rise in global prices of crude oil, food and other commodities is expected to keep up the upward pressure.

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.

India's central bank maintained its growth projection at 7.2% for 2022/23.

The central bank had slashed the repo rate by a total of 115 bps since March 2020 to soften the blow from the COVID-19 crisis.

India's 10-year benchmark bond yield fell to 7.5% after the policy decision, while the rupee strengthened against the dollar to 77.69.

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