RBI hikes repo rate by 50 bps to 4.90%, raises inflation forecast to 6.7%

The Reserve Bank of India on Wednesday hiked benchmark lending rates by 50 basis points to control skyrocketing prices of food, fuel and other commodities, governor Shaktikanta Das announced as the Monetary Policy Committee (MPC), which started its deliberations on Monday, concluded its review.

RBI raised the repo rate, or the rate at which the central bank lends short-term cash to other banks, by 50 basis points to 4.90 per cent from 4.40 per cent.

The central bank also revised India's inflation projection to 6.7 per cent from the earlier estimate of 5.7 per cent as inflation remained much above its tolerance limit.

But the move will make home, auto and other personal loans and the government's market borrowing much more costlier.

Read | RBI retains growth projection at 7.2% for FY23

Soon after the announcement, 10-year bond yields rose to a three-year high of 7.56 per cent. Higher yield on the government paper means higher the cost of borrowing.

The hike in repo rate comes on the back of a 40 basis points rise on May 4. The Consumer Price Index (CPI) based inflation, which RBI factors in while arriving at its monetary policy, is on the rise since October 2021. Retail inflation has remained above RBI's upper tolerance level of 6 per cent since January. It had soared to an 8-year high of 7.79 per cent in April. The May inflation print is due next week.

On the economic growth, Das said the recovery has gained momentum and left the projections for GDP growth in the financial year 2022-23 at 7.2 per cent

Last month, in an off-cycle review MPC raised the key policy rate (repo) by 40 basis points to 4.4 per cent in a bid to curb soaring prices and inflation. It was the first rate hike after August 2018.

With an aim to cushion the impact of lockdown, RBI had slashed the repo rate by 75 basis points to 4.40 per cent in March 27, 2020 from 5.15 per cent.

On May 22, 2020, RBI again cut the repo rate by 40 basis points and brought it down to 4 per cent. Thereafter, it maintained status-quo in the benchmark interest rate for almost two years before increasing it on May 4, 2022.

(With agency inputs)