The Reserve Bank of India intensified its fight to contain persistently rising inflation on Friday by raising the benchmark lending rate by 50 basis points, the fourth straight hike since May. The key lending rate, also known as the repo rate, was increased by the monetary policy committee (MPC), which consists of three members from the RBI and three outside experts, to 5.90%, the highest level since April 2019. Five of the committee’s six members voted in favour of the increase.
Interest rates have increased by a total of 190 basis points since the first unexpected mid-meeting hike in May, mirroring similarly dramatic monetary tightening in major countries around the world to tame runaway inflation by slowing demand.
According to RBI Governor Shaktikanta Das, the MPC also resolved to continue focusing on the withdrawal of the accommodating policy stance to ensure that inflation stays within the goal going forward while promoting growth.
“Uncertainties resulting from ongoing geopolitical tensions and uneasy global financial market emotions continue to cast a shadow over the inflation trend,” he warned. “In light of this, the MPC believed that continued high inflation required a further, carefully calibrated removal of monetary accommodation in order to curb the expansion of price pressures, stabilise inflation expectations, and limit the second-round impacts. The prospects for our economy’s medium-term growth will be aided by this measure.”
Due to significant adverse supply shocks, some firming up of domestic demand, and the spillovers from global financial markets, retail inflation remains elevated and above the upper tolerance band of the target, he added, adding that recent corrections in global commodity prices, including crude oil, may ease cost pressures in the coming months if sustained. As a result of persistent geopolitical unrest and tightening financial conditions worldwide, the central bank reduced its prediction of India’s economic growth for the current fiscal year from 7.2% to 7%.
However, it kept the 2022–2023 retail inflation prediction at 6.7%. Due to a spike in food costs, consumer price inflation (CPI) escalated to 7% in August and has since been above the RBI’s stipulated 2–6% target range for eight straight months. Higher borrowing costs for both corporations and individuals would result from the increase in repo rates. Anu Aggarwal, head of corporate banking at Kotak Mahindra Bank, predicted that the rate increase will delay the start of corporate India’s investment plans. The COVID-19 epidemic and the situation in Ukraine, according to Das, have caused two significant shocks to the global community in the past 2.5 years. “These shocks have had a significant effect on the world economy.”
And right now, he claimed, the globe is experiencing a third significant shock in the form of a “storm” brought on by the aggressive monetary policy measures of central banks in developed nations. “The Indian economy is still remarkably resilient in the face of this uncertain global situation. Macroeconomic stability exists. The financial system is still in place, but with better performance metrics, “added he. The COVID-19 and the Ukraine crisis have not shocked the nation. A late recovery in kharif sowing, comfortable reservoir levels, an improvement in capacity utilisation, brisk bank credit expansion, and the government’s continued focus on capital expenditure are expected to support aggregate demand and output in the second half. Real GDP growth in the June quarter was lower than the RBI’s estimate at 13.5%.
(source : PTI)
