RBI raises repo rate by 50 basis points to 5.4%, says inflation is expected to remain high

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Reserve Bank of India on Friday increased the repo rate by 50 basis points to 5.4% in an attempt to control inflation, said Governor Shaktikanta Das after the bi-monthly monetary policy meeting.

This is the third hike in the repo rate within three months. The Reserve Bank of India had raised the repo rate by 50 basis points to 4.90% on June 8.

The repo rate is the interest rate at which the central bank lends to commercial banks. The reverse repo rate, on the other hand, allows banks to deposit funds with the central bank and earn interest on them.

The repo rate is now back to pre-pandemic levels, at its highest since August 2019.

India’s retail inflation has stayed above the Reserve Bank of India’s upper tolerance level of 6% for six straight months till June.The price-rise indicator had touched an eight-year-high of 7.79% in April.

Das on Friday said that inflation is expected to remain above the central bank’s 6% threshold in the second and third quarters of this fiscal year.

“Volatility in global financial markets is impinging upon domestic financial markets leading to imported inflation,” he said. “Consumer price inflation has eased from its surge in April but remains uncomfortably high and above the upper threshold of target.”

Das also mentioned the International Monetary Fund’s revision of economic growth projection and expressed the risk of recession.

On July 27, the International Monetary Fund cut India’s economic growth forecast for 2022-’23 to 7.4% from its April estimate of 8.2%.

The governor said that the real gross domestic product growth has been retained at 7.2%.

Other announcements

  • The rupee has fared better than Asian currencies, said Das. The value of the rupee has depreciated due to increasing value of dollar and not because of the macroeconomic situation, he added. The rupee last month crossed the 80-mark against the dollar.
  • Bank credit growth has increased by 14% as against 5.5% last year.
  • India has been facing a $13.3 billion capital outflow in the last few months.
  • Edible oil prices could go down.
  • Foreign direct investment is at $13.6 billion (Rs 1.05 lakh crore) in the first quarter as compared to $11.6 billion (Rs 91,725 crore) last year.

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