RBI Hikes Repo Rate To Three-Year High Of 5.4%; Inflation To Remain 'Elevated' At 6%

RBI MPC Updates: The hike was driven by elevated inflation, aggressive global central bank policies, and turmoil in financial markets.

RBI Hikes Repo Rate To Three-Year High Of 5.4%; Inflation To Remain 'Elevated' At 6%
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THE RESERVE Bank of India on Friday increased the key lending rates by 50 basis points with immediate effect. The repo rate now stands at 5.9 per cent against the previous 5.4 per cent by the monetary policy committee (MPC). The hike was driven by elevated inflation, aggressive global central bank policies, and turmoil in financial markets.

In the meeting of the Monetary Policy Committee (MPC) that started on Wednesday, five of the members of the MPC voted to hike the key lending rate, repo rate, by 50 basis points (bps). The rates for the standing deposit facility (SDF) and the marginal standing facility (MGF) were also raised by 50 basis points to 5.65 per cent and 6.15 per cent, respectively.

The central bank had already hiked the key policy rate by 140 bps since May to 5.4 per cent to cool off domestic retail inflation that has stayed above the RBI's upper tolerance limit of 6 per cent each month this year. The MPC is responsible for fixing the benchmark interest rate in India. In the committee, three members are from RBI and three members are from outside.

The MPC, however, kept the inflation forecast unchanged and maintained the retail inflation forecast for the current fiscal at 6.7 per cent. RBI has been hiking repo rates since May 4 this year. RBI cut the repo rate in March 2020 to reduce the impact of the coronavirus pandemic and resultant nationwide lockdown.

Since then it had maintained the status quo till May 4 this year. Commenting on the global economic scenario, Das in his virtual customary address said, "We are faced with another storm of aggressive monetary tightening globally. The global economy is in the eye of a new storm."

He added that the step is causing volatility and risk aversion in the financial markets. The rate hike has also been necessitated due to the rising food prices, which have been spiralling owing to the supply disruptions due to the ongoing Russia-Ukraine war.

Also, the fast depreciating rupee has led to the RBI's decision. On inflation, the RBI Governor said that it would remain high. "The recent correction in global commodity prices, if sustained, may ease cost pressures in coming months. Today inflation is hovering around 7 per cent and we expect it to remain elevated at 6 per cent in the second half of the year," he said.

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