The Reserve Bank of India (RBI) on Wednesday hiked its benchmark repo rate by 0.25 basis points. This is the first hike in the repo rate in the past 4 years. The repo rate is the basis for lending to other banks.
The decision to increase the repo rate from 5.25 percent to 5.5 percent was taken unanimously by the Monetary Policy Committee headed by Governor Sanjay Malhotra that voted in favour of the hike. The rise comes amid increasing oil prices, fuelling inflation and a weaker rupee. Weak monsoon rains linked to El Niño have compounded price pressures in Asia’s third-largest economy.
In his MPC address, Malhotra said, “Global inflation is expected to rise. Trade uncertainty continues to linger. Global sentiment remains fragile. The impact of the Iran war could also disrupt trade and supply chains.”
He further added that the Indian economy remains strong and is expected to stay resilient.
For the first time since 2018, the central bank changed its monetary policy stance from ‘neutral to calibrated tightening’. A neutral stance means the RBI is keeping its options open either to raise or cut interest depending on how inflation and growth evolve. On the other hand, calibrated tightening means the RBI is now leaning toward monetary policy and is prepared to act if inflationary pressures persist.
The RBI also raised its core inflation forecast for the current financial year to 4.4 percent from 4.3 percent. Despite a stronger growth outlook, the rate hike was announced.
The GDP forecast for the year was raised to 7.1 percent from 6.7 percent earlier. As per the data given by the Central Bank, economic activity has maintained momentum in the second quarter from July to September.