RBI hikes repo rate by 25 basis points to 6.5%
The Reserve Bank of India (RBI) Governor Shaktikanta Das announced on Wednesday that the country's repo rate has been raised by 25 basis points to 6.5%. The decision came during this fiscal year's last policy review by the Monetary Policy Committee (MPC) amid ebbing inflation. The reverse repo rate remains unchanged at 3.35%.
Why does this story matter?
- The panel has so far increased the key rate by 250 points since May.
- The repo rate is the interest rate that the RBI charges commercial banks while lending them money. The increase is intended to put the brakes on the banks' borrowing.
- The rates have been hardened against the backdrop of heightened inflation due to the Russia-Ukraine crisis disrupting the global supply chain.
Repo rate raised for the 6th time this fiscal year
Four out of six members of the MPC supported the decision to raise the repo rate. It was increased last December by 0.35% for the fifth time this fiscal year, which was preceded by three back-to-back hikes of 50 basis points. Retail inflation has improved, and the United States (US) Federal Reserve is moderating its benchmark interest rate.
RBI failed to keep inflation within 6%
"Unprecedented events of the last three years have put to test monetary policy across the world. Emerging market economies are facing sharp tradeoffs between supporting economic activity and controlling inflation while preserving policy credibility," Das said. Tasked with maintaining retail inflation at 4% with a 2% margin, the RBI failed to contain the inflation rate within 6% for three consecutive quarters since January 2022.
Highest repo rate in 7 years
The new repo rate of 6.5% is the highest since February 2019. Das recently stated that with COVID-19 restrictions easing and inflation falling in many countries, central banks in many countries were moving toward lower rate hikes or pauses. In view of this, the RBI cut down its inflation forecast for the fiscal year 2023-24 averaging 5.3%.
GDP growth for the next fiscal year forecast at 7%
The RBI forecasts inflation in Q1 of the fiscal year 2023-24 at 5%, Q2 and Q3 at 5.4%, and Q4 at 5.6%. The real GDP growth for FY24 has been pegged at 6.4% and for FY23 at 7%. Das said that despite the revision in the growth projection for FY23, India will remain among the fastest-growing major economies in the world.