Nagpur/Mumbai: The Reserve Bank of India (RBI) hiked its key lending rate by 50 basis points to pre-pandemic levels of 5.40 per cent on Friday, a third increase in a row to tame surging inflation which has remained above the upper end of the central bank’s target this year.
With June retail inflation at 7 percent, well above the RBI’s 2-6 per cent medium-term target, the Monetary Policy Committee (MPC) raised the key lending rate or the repo rate by 50 basis points (bps) to 5.40 per cent, the highest since 2019.
With the latest hike, the repo rate or the short term lending rate at which banks borrow crossed the pre-pandemic level of 5.15 per cent. All the six members of the Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, unanimously voted for the rate hike. The RBI had caught markets off guard with a 40 bps hike at an unscheduled meeting in May, followed by a 50 bps increase in June, but prices have shown little signs of cooling so far.
RBI Governor Shaktikanta Das weighed in on the dilemma the central bank faces, with pressing economic concerns to be addressed. Retail inflation, based on the Consumer Price Index (CPI), which RBI factors in while fixing its benchmark rate, stood at 7.01 per cent in June. Inflation has been ruling above the RBI’s comfort level of 6 per cent since January this year and the Governor expects that trend to continue. Inflation based on the Wholesale Price Index (WPI) remained in double-digit for 15 months in a row. The WPI reading was at 15.18 per cent in June.
The latest RBI action follows the Bank of England raising rate by 50 basis points, the biggest hike in 27 years, to 1.75 per cent. Last month, the US Federal Reserve effected its second consecutive 0.75 percentage point interest rate increase, taking its benchmark rate to a range of 2.25-2.5 per cent. Traders now wait for the RBI Governor’s commentary on the outlook and any clues on the pace of tightening going ahead.