RBI hikes repo rate hiked by 50 bps to tame inflation

The Reserve Bank of India (RBI) on Friday hiked the repo rate by 50 basis points (bsp) to 5.4 per cent with immediate effect, crossing the pre-pandemic level of 5.15 per cent. RBI's rate-setting panel -- the Monetary Policy Committee (MPC) -- met for three days to deliberate on the prevailing economic situation. This is the  third increase in a row to tame surging inflation which has remained above the upper end of the central bank's target this year. The MPC has justified the decision by saying that “calibrated monetary policy action is needed to contain inflationary pressures, pull back headline inflation within the tolerance band closer to the target, and keep inflation expectations anchored so as to ensure that growth is sustained”. The MPC has retained its inflation and GDP growth projection for the fiscal year 2022-23 at 6.7% and 7.2%, respectively.

Retail inflation, based on the Consumer Price Index (CPI), which RBI factors in while fixing its benchmark rate, stood at 7.01 per cent in June. Inflation has been ruling above the RBI's comfort level of 6 per cent since January this year and the Governor expects that trend to continue. Inflation based on the Wholesale Price Index (WPI) remained in double-digit for 15 months in a row. The WPI reading was at 15.18 per cent in June. Both the central bank and the government have been taking steps to contain inflation which is ruling above the RBI's comfort level of 6 per cent since January this year.