RBI hikes policy repo rate by 50 bps, raises inflation forecast to 6.7 per cent

Mumbai (Maharashtra) [India], June 8 : The Reserve Bank of India (RBI) on Wednesday hiked the policy repo rate by 50 basis points to 4.9 per cent and raised the inflation projection for the current financial year to 6.7 per cent.
RBI Governor Shaktikanta Das announced that the Monetary Policy Committee (MPC) has "voted unanimously to increase the policy repo rate by 50 basis points to 4.90 per cent, with immediate effect".
Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.65 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 5.15 per cent.
The MPC also decided unanimously to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.
This is the second hike in the policy repo rate since the being of the current financial year.
Last month, in its off-cycle monetary policy review the central bank hiked policy repo rate by 40 basis points or 0.40 per cent to 4.4 per cent. This was the first increase in policy repo rate in nearly two years. The repo rate is the interest rate at which the RBI lends short-term funds to banks.
The RBI revised upward the inflation projection for the current financial year to 6.7 per cent from its earlier projection of 5.7 per cent.
According to the RBI, inflation is projected to remain at 7.5 per cent in the first quarter of the current financial year. In the second quarter, it is projected at 7.4 per cent. For the third quarter at 6.2 per cent and for the fourth quarter of 2022-23 headline inflation is projected at 5.8 per cent.
"It may be noted that around 75 per cent of the increase in inflation projections can be attributed to the food group. Further, the baseline inflation projection of 6.7 per cent for 2022-23 does not take into account the impact of monetary policy actions taken today," RBI Governor said in the monetary policy statement.
Between February and April, headline inflation has increased by about 170 basis points. With no resolution of the war in sight and the upside risks to inflation, prudent monetary policy measures would ensure that the second-round effects of supply side shocks on the economy are contained and long-term inflation expectations remain firmly anchored and inflation gradually aligns close to the target, he said.
"The monetary policy actions including withdrawal of accommodation will be calibrated keeping in mind the requirements of the ongoing economic recovery," Das added.
Explaining the rationale for the repo rate hike, the RBI Governor said, "The protracted war in Europe and the accompanying sanctions have kept global commodity prices elevated across the board. This is exerting sustained upward pressure on consumer price inflation, well beyond the targets in many economies."
The ongoing war is also turning out to be a dampener for global trade and growth. The faster pace of monetary policy normalisation undertaken by systemic advanced economies (AEs) is leading to heightened volatility in global financial markets.
The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth. It may be noted in this context that the repo rate still remains below its pre-pandemic level.