India's central bank raises interest rates by 50 basis points to curb price increases

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The Reserve Bank of India raised its key policy repo rate by 50 basis points on Friday, the third increase in the current cycle, to cool stubbornly high inflation that has remained above the central bank's tolerance band for six straight months.

With June retail inflation hitting 7 per cent, economists polled by Reuters had expected the third rate increase in as many months, but views were widely split between an increase between 25 bps and 50 bps. The central bank's Monetary Policy Committee raised the key lending rate or the repo rate to 5.40 per cent. “Inflation is projected to remain above the upper tolerance level of six per cent through the first three quarters of 2022-23, entailing the risk of destabilising inflation expectations and triggering second round effects,” the committee said.

The standing deposit facility rate and the marginal standing facility fate were adjusted higher by the same rate to 5.15 per cent and 5.65 per cent, respectively. The RBI caught markets off guard with a 40 bps increase at an unscheduled meeting in May, followed by a 50 bps increase in June. However, prices have shown little sign of cooling off yet.

With inflation staying elevated, more rate raises in coming months are all but inevitable, economists say. “Expect the RBI to take the repo rate to 5.75 per cent in this cycle,” said Sakshi Gupta, principal economist at HDFC Bank in Gurugram.

The price increases have hammered consumer spending and darkened the near-term outlook for India's economic growth, which slowed to its lowest in a year in the first three months of 2022. The Monetary Policy Committee retained its gross domestic product growth projection for 2022/2023 at 7.2 per cent while its inflation forecast remained unchanged at 6.7 per cent.

The committee believes a “calibrated withdrawal of monetary policy accommodation is warranted to keep inflation expectations anchored and contain the second round effects”, RBI Governor Shaktikanta Das said while announcing the policy decision.

Mr Das said the decision to increase rates was a unanimous one. The partially convertible rupee firmed slightly to 79.08 per dollar, from 79.16 before the policy decision. The local unit had closed at 79.4650 in the previous session.

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