August 20, 2022
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RBI Hikes Key Rate By 0.50% To 5.40%, Highest Since 2019

The Reserve Bank of India increased its benchmark lending rate by 50 basis points on Friday, bringing it to pre-pandemic levels of 5.40 percent. This was the third consecutive increase to the rate, which was raised to combat this year’s persistently high inflation.

The monetary policy committee (MPC) increased the benchmark lending rate, often known as the repo rate, by 50 basis points (bps), to 5.40 percent, the highest level since 2019. June retail inflation was 7.0%, far beyond the RBI’s medium-term target of 2–6%. With the most recent increase, the repo rate, or the short-term lending rate at which banks borrow, reached a level higher than that of the pre-pandemic 5.15 percent.

The rate increase received a unanimous yes vote from all six members of the Monetary Policy Committee (MPC), which is chaired by RBI Governor Shaktikanta Das.

Prices have so far not showed much evidence of dropping, despite the RBI shocking markets with a 40 bps boost at an unexpected meeting in May and a 50 bps increase in June.

Shaktikanta Das, governor of the RBI, commented on the difficulty the central bank is facing in light of the urgent economic issues that need to be handled.

Consumer Price Index (CPI)-based retail inflation, which the RBI takes into account when determining its benchmark rate, was 7.01 percent in June. Since January of this year, inflation has exceeded the RBI’s comfortable threshold of 6%, and the Governor anticipates that it will continue to rise.

The RBI has maintained its prediction of 7.2% growth for 2022–2023 and anticipates growth of 16.2% in the first quarter of the current fiscal year, which will taper to 4% by the fourth quarter. However, Mr. Das emphasised that the ongoing conflict between Russia and Ukraine poses hazards.

The US Federal Reserve raised interest rates last month for the second time in a row by 0.75 percentage points, bringing the benchmark rate to a range of 2.25–2.5%. Traders are now waiting for the governor of the RBI to comment on the outlook and offer any hints regarding the rate of tightening going forward.

Picture Courtesy: Google/images are subject to copyright

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