The Reserve Bank of India on Friday increased the repo rate by 50 basis points to 5.9% to fight inflation.
The repo rate is the interest rate at which the central bank lends money to commercial banks.
This is the fourth hike in the repo rate since May. The central bank had raised the repo rate by 50 basis points to 5.4% on August 5.
The monetary policy committee, which has three members from the Reserve Bank of India and three external members, raised the key lending rate on Friday with a five out of six majority.
On Friday, Governor Shaktikanta Das said that after the world witnessed two shocks – the Covid-19 pandemic and the Ukraine conflict – the countries are facing another storm arising from aggressive monetary policies of the global central banks.
“All segments of the financial market including equity, bond and currency markets are in turmoil across countries,” Das said. “There is nervousness in financial markets with potential consequences for the real economy and financial stability. The global economy is in the eye of a new storm.”
Several central banks such as the United States Federal Reserve, the Bank of England, the Swiss National Banks and others have increased their interest rates recently due to rising inflation.
On Friday, the Reserve Bank of India also reduced the growth projection to 7% for the current fiscal from the earlier forecast of 7.2%.
It, however, maintained its estimate for consumer inflation in the country at 6.7% for the current fiscal year.
India’s retail inflation has stayed above the Reserve Bank of India’s upper tolerance level of 6% for six straight months till June. The price rise indicator had touched an eight-year-high of 7.79% in April.
In his address, Das said India’s economy has remained resilient despite global shocks.
“There is macroeconomic stability,” the governor said. “The financial system remains intact, with improved performance parameters. Our journey over the last two and half years, [and] our steely resolve in dealing with the various challenges gives us the confidence to deal with the new storm we are confronted with.”
He also addressed the concerns about the rupee’s swift decline against the US dollar in recent sessions, saying that a stable exchange rate is a beacon of macroeconomic stability and market confidence.
“The rupee is a freely floating currency and its exchange rate is market-determined,” Das said. “The RBI does not have any fixed exchange rate in mind. It intervenes in the market to curb excessive volatility and anchor expectations.”