The Reserve Bank of India Raises Key Rate 50 Bps as Inflation Increases

RBI

India’s Central bank’s key policy repo rate was raised by 50 basis points today, becoming the third increase in the current cycle to cool the inflation that has remained above the central bank’s tolerance band for the past six months.

With June retail hitting 7%, the market expected the third rate hike in four months, but views were widely split between a 25 bps to a 50 bps increase.

The monetary policy committee (MPC) raised the key lending rate or the repo rate to 5.40 %

“Inflation is projected to remain above the upper tolerance level of 6 % through the first three quarters of 2022-23, entailing the risk of destabilizing inflation expectations and triggering second-round effects,” the MPC said in its statement.

The Standing Deposit Facility rate and the Marginal Standing Facility Rate were adjusted higher by the same quantum to 5.15% and 5.65, respectively.

The RBI caught markets off guard with a 40 bps hike at an unscheduled meeting in May, then a 50 bps increase in June, but inflation persists.

Economists say that increased rate hikes are inevitable with inflation staying elevated in the coming months.

“The RBI today raised the repo rate by 50 bps to 5.40% as we had anticipated, and struck a relatively hawkish tone despite inflation surprising to the downside in recent months,” said Shilan Shah, senior India economist at Capital Economics.

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