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RBI Hikes Rates as Expected, Says Inflation Battle Not Over

Reuters
Dec 07, 2022
The Reserve Bank of India's key repo rate was raised by 35 basis points (bps) on Wednesday as widely expected, the fifth straight increase, saying its battle against high inflation is not yet over.

Mumbai: The Reserve Bank of India’s key repo rate was raised by 35 basis points (bps) on Wednesday as widely expected, the fifth straight increase, saying its battle against high inflation is not yet over.

The monetary policy committee (MPC), comprising three members from the RBI and three external members, raised the key lending rate or the repo rate to 6.25% in a majority decision. Five of the six members voted in favour of the increase.

A strong two-thirds majority in a Reuters analysts poll had predicted a 35 bps increase, smaller than its last three hikes of 50 bps each, and said it was still too soon for the central bank to take its eye off inflation, which has stayed above the upper end of the RBI’s 2-6% tolerance band all year.

India’s annual retail inflation eased to a three-month low of 6.77% in October, helped by a slower rise in food prices and a higher base effect, strengthening bets on smaller rate increases by the RBI going ahead.

Still, despite some signs of moderation, RBI Governor Shaktikanta Das said the main risk was that inflation would remain sticky and elevated.

“The MPC was of the view that further calibrated monetary policy action was warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects,” Das said as he announced the monetary policy committee’s decision.

The MPC maintained its stance on “withdrawal of accommodation”, with four out of six members voting in favour as the committee continues to focus on pulling out high levels of cash from the banking system without stunting growth.

Investors expect at least one more rate hike in the current cycle at the next meeting.

The standing deposit facility rate and the marginal standing facility rate were also increased by the same quantum to 6.00%and 6.50%, respectively.

Indian rupee dipped against the dollar, while government bond yields rose after the policy decision and comments on inflation. The rupee was at 82.64, down from 82.53 before policy decision, while the benchmark bond yield rose to 7.2985%, the highest in last two weeks and up from 7.2113% before the decision.

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