RBI raises interest rate for banks to tame inflation
The central bank increased the repo rate by 0.25% to 6.5% – the sixth hike since May.
The Reserve Bank of India on Wednesday increased the repo rate by 25 basis points, or 0.25%, to 6.5%. The repo rate is the interest rate at which the central bank lends money to commercial banks.
Reserve Bank of India Governor Shaktikanta Das made the announcement after the central bank’s bi-monthly monetary policy meeting. This is the sixth hike in the repo rate since May. The central bank had raised the repo rate by 35 basis points to 6.25% in December.
“Unprecedented events of the last three years have put to test monetary policy across the world,” Das said at a press briefing on Wednesday. “Emerging market economies are facing sharp tradeoffs between supporting economic activity and controlling inflation while preserving policy credibility.”
Meanwhile, Das pegged India’s economic growth for financial year 2023-’24 at 6.4%. The Economic Survey released by the Union finance ministry on January 31 had projected India’s Gross Domestic Growth, or GDP, to be in the range of 6% to 6.8% in the next financial year. In this fiscal year (2022-’23), India’s economy is expected to grow by 7%.
As for inflation, Das said the Reserve Bank of India has projected it to be 6.5% in this financial year and 5.3% in the next.
Central banks typically increase key lending rates at times of high inflation in economies. Higher key lending rates translate into high interest on loans disbursed by commercial banks. This, in turn, keeps a check on discretionary spending by consumers which is expected to help them with prices rise due to high inflation.
The rate hike of 25 basis points was considered appropriate at this juncture to keep the central bank agile on monetary policy and alert to inflation, Das said at his press briefing.
The latest data on retail inflation showed that the price rise indicator stood at 5.72% in December – the lowest in a year. The numbers also marked the second consecutive month when retail inflation stayed under the Reserve Bank of India’s upper tolerance level. The central bank aims to keep inflation between 2% and 6%.