The Reserve Bank of India’s monetary policy committee raised the prime lending rate or repo rate to 5.40%.
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The Reserve Bank of India’s key policy repo rate was raised to 50 basis points on Friday, the third increase in the current cycle to cool off stubbornly high inflation that remains above the bear band. central bank holdings for six consecutive months.
With June retail inflation hitting 7%, economists polled by Reuters had expected a third rate hike in four months, but views differ between a 25 bps increase to 50 bps.
The Monetary Policy Committee (MPC) raised the prime lending rate or repo rate to 5.40%.
“Inflation is forecast to remain above the allowable level above 6% in the first three quarters of 2022-23, leading to the risk of destabilizing inflation expectations and causing a second round effect,” the MPC said in a statement. its statement.
The fixed deposit rate and the marginal base deposit rate are adjusted higher by the same quanta to 5.15% and 5.65%, respectively.
The RBI caught the market off guard with a 40 bps rally at a surprise meeting in May, followed by a 50 bps gain in June, but prices show no sign of cooling down yet.
With inflation continuing to rise, rate hikes are inevitable in the coming months, economists say.
Shilan Shah, senior India economist at Capital Economics, said: “The RBI today raised the repo rate by 50 bps to 5.40% as we had anticipated, and delivered a relative tone. hawks despite the surprising drop in inflation in recent months.”
“Clearly the tightening cycle is still in place and we expect another 100 bps increase in early 2023,” he added.
Soaring food and fuel prices have hit consumer spending and dimmed the short-term outlook for India’s economic growth, which has slowed to a one-year low in three months. early 2022.
MPC left its GDP growth forecast for 2022/23 unchanged at 7.2% while its inflation forecast was unchanged at 6.7%.
“With growth momentum expected to recover despite difficulties from the external sector, monetary policy needs to persist further in its retreat stance to ensure inflation stays close to the 4% target in the medium term, while supporting growth,” Governor Shaktikanta Das said in his speech.
Das said the decision to raise the exchange rate was one of unanimous decision.
The yield on the benchmark 10-year bond rose after the RBI decision and was at 7.25% by 06:00 GMT. It fell to 7.1073% earlier on Friday after ending at 7.1566% on Thursday.
The partially convertible rupee rose slightly to 79.0675 per dollar, from 79.16 before the policy decision. The local unit closed at 79,4650 in the previous session.