The Reserve Bank of India on Wednesday increased the repo rate by 50 basis points to 4.90% in an attempt to control inflation. RBI Governor Shaktikanta Das made the announcement after the central bank’s bi-monthly monetary policy meeting.
This is the second hike in the repo rate within five weeks. The Reserve Bank of India had raised the repo rate by 40 basis points to 4.40% on May 4, in the first such hike since August 2018.
Repo rate is the interest rate at which the central bank lends to commercial banks. The reverse repo rate, on the other hand, allows banks to deposit funds with the central bank and earn interest on them.
India’s retail inflation rose to an eight-year high of 7.79% in April. Meanwhile, the price rise indicator in wholesale markets was at 15.08% in April. It has now remained in double digits for 13 consecutive months.
At a press conference in Mumbai on Wednesday, Das said that the price rise indicator has steeply increased “much beyond the tolerance level”. The central bank aims to keep retail inflation within the range of 2% to 6%.
“Process of recovery in emerging market economies is also getting affected,” Das said. “But the Indian economy has remained resilient. We have started a gradual withdrawal of the extraordinary accommodation.”
On May 24, Das had said that there would be an increase in the repo rate but did not specify its extent. “Expectation of a rate hike is a no-brainer,” he had said, according to The Indian Express.
Inflation and growth projection
The Reserve Bank of India has also increased the inflation forecast for the financial year 2022-’23 to 6.7% from its earlier estimate of 5.7%.
“The tense global geopolitical situation and the consequent elevated commodity prices impart considerable uncertainty to the domestic inflation outlook,” the Monetary Policy Committee said.
The central bank said it expects the retail inflation to be at 7.5% in the first quarter (April-June), 7.4% in the second (July-September), 6.2% in the third (October-December) and 5.8% in the fourth quarter (January-March) of this financial year.
The RBI has retained its growth projection for the country at 7.2% for the current fiscal citing a recovery in domestic economic activities. The bank expects a 16.2% growth in the first quarter, 6.2% in the second, 4.1% in the third and 4% in the fourth quarter of 2022-’23.
Other announcements
The Reserve Bank of India on Wednesday doubled the limit for housing loans provided by urban cooperative and rural cooperative banks.
“This will facilitate a better flow of credit to the housing sector,” Das said.
The central bank has also proposed to link credit cards with the Unified Payments Interface, or UPI.
“To begin with, the Rupay credit cards will be linked to the UPI platform,” Das announced. “This will provide additional convenience to users and enhance the scope of digital payments.”
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