The Reserve Bank of India on Friday raised the benchmark lending repo rate by 50 basis points to 5.40%, the third increase in as many months to cool stubbornly high inflation.
The Standing Deposit Facility rate and the Marginal Standing Facility Rate were accordingly adjusted higher by the same quantum to 5.15% and 5.65%, respectively.
With the latest hike, the repo rate, or the short-term lending rate at which banks borrow, has crossed the pre-pandemic level of 5.15%.
Following the rate revision, shares advanced, the rupee strengthened and bond yields rose.
The RBI caught markets off guard with a 40 bps hike at an
unscheduled meeting in May, followed by 50 bps increase in June, but prices have shown little sign of cooling off yet.
With inflation seen holding above the top of the central
bank's 2-6% tolerance band for at least the rest of 2022, more rate hikes in coming months are all but inevitable, economists say.
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.
"With inflation expected to remain above the upper tolerance threshold in Q2 and Q3 of the current financial year, The monetary policy committee (MPC) stressed that sustained high inflation could de-stabilise inflation expectations and harm growth in the medium term," RBI Governor Shaktikanta Das said while announcing the policy decision.
"The MPC, therefore, judged that further calibrated withdrawal of monetary policy accommodation is warranted to keep inflation expectations anchored and contain the second round effects," he added. Das said the decision to increase rates was a unanimous one.
However, the central banker retained its retail inflation forecast for the current fiscal year at 6.7% amid geopolitical developments and higher global commodity prices, hoping inflationary pressures to ease further.
In its previous monetary policy review in June, it had projected retail inflation for 2022-23 at 6.7%, up from 5.7% forecast in April.
The benchmark 10-year bond yield climbed after the RBIs decision and was at 7.2317% in the initial trades. It had
declined to 7.1073% earlier on Friday after ending at 7.1516% on Thursday.
Rupee firmed slightly to 78.99 per dollar, from 79.16 prior to the policy decision. The local unit had closed at 79.4650 in the previous session.
The latest RBI action follows the Bank of England raising the rate by 50bps, the biggest hike in 27 years, to 1.75%.
Last month, 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%.
(With inputs from Reuters)