India raises interest rates for third time to tame inflation

MUMBAI (REUTERS) – The Reserve Bank of India (RBI) raised its key lending rate, or the repo rate, by 50 basis points on Friday (Aug 5) to 5.4 per cent, the third increase in as many months to cool stubbornly high inflation.

With June retail inflation at 7 per cent, economists polled by Reuters had expected another rate hike, but views were widely split between an increase of 25 basis points and 50 basis points.

The standing deposit facility rate and the marginal standing facility rate were accordingly adjusted higher by the same quantum to 5.15 per cent and 5.65 per cent respectively.

The RBI caught markets off guard with a 40-basis point hike at an unscheduled meeting in May, followed by 50-basis point increase in June, but prices have shown little sign of cooling off yet.

With inflation seen holding above the top of the central bank’s 2 per cent to 6 per cent tolerance band for at least the rest of 2022, more rate hikes in the coming months are all but inevitable, economists say.

The price spikes have hammered consumer spending and darkened the near-term outlook for India’s economic growth, which slowed to the lowest in a year in the first three months of 2022.

“With inflation expected to remain above the upper tolerance threshold in the second quarter and third quarter of the current financial year, the MPC (monetary policy committee) stressed that sustained high inflation could destabilise inflation expectations and harm growth in the medium term,” RBI governor Shaktikanta Das said when announcing the policy decision.

“The MPC therefore judged that further calibrated withdrawal of monetary policy accommodation is warranted to keep inflation expectations anchored and contain the second-round effects,” he added.

Mr Das said the decision to increase rates was a unanimous one.

Traders are now awaiting the RBI governor’s comments on the outlook for liquidity in the banking system and any hints on the pace of tightening going ahead.

The benchmark 10-year bond yield climbed after the RBI’s decision and was at 7.2317 per cent at 12.45pm Singapore time. It had declined to 7.1073 per cent earlier on Friday after ending at 7.1516 per cent on Thursday.

The partially convertible rupee firmed slightly to 78.99 per US dollar, from 79.16 prior to the policy decision. The local unit had closed at 79.4650 in the previous session.