RBI Hikes Repo Rate To 5.4%; Curbing Inflation To Remain Focus

The Reserve Bank of India (RBI) hiked the repo rate by 50 basis points on Friday to 5.4 per cent, its third hike in the current financial year continuing its fight to tame stubbornly high inflation.

The decision of the six-member Monetary Policy Committee (MPC) of the RBI, which met on August 3 to Aug 5, 2022 was largely in line with expectations. Financial markets were largely unchanged at mid day as the hike was on expected lines.

June 2022 was the sixth consecutive month when headline CPI (consumer price inflation) inflation remained at or above the upper tolerance level of 6 per cent, the RBI said.

The central bank said it would continue its stance of withdrawal of accommodation to ensure that inflation moves close to the target of 4 per cent over the medium term, while supporting growth.

"With inflation expected to remain above the upper threshold in Q2 and Q3, the MPC stressed that sustained high inflation could destabilise inflation expectations and harm growth in the medium term.," the committee said in a statement.

The RBI retained its real GDP growth forecast at 7.2 per cent for the current financial year.

It flagged protracted geopolitical tensions; rising global financial market volatility; tightening global financial conditions; and global recession risks as headwinds to the Indian economy.

The repo rate is the rate at which banks borrow from the RBI on a short-term basis.

The latest hike has taken the repo rate to pre-pandemic levels of late 2019. The central bank had caught markets off guard with an unscheduled 40 basis point hike in the repo rate in May followed by a 50 basis point hike in June this year to control runaway inflation.

Central banks in economies around the world are hiking their policy interest rates around the world for two primary reasons. First, it is to withdraw the extraordinary easy money policies they had during the COVID-19 pandemic and second, to combat inflation that has spread across the world as a result of supply shock bottlenecks caused due to the Russia-Ukraine conflict.