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Inflation to stay? RBI hikes key interest rate by 50 basis points

Amidst inflation fears and the possibility of a global economic slowdown, the Reserve Bank of India on Friday announced its decision to increase the benchmark interest rate, repo rate, by 50 basis points.

The decision to increase the repo rate was taken by members of the Monetary Policy Committee of the Reserve Bank of India. MPC consists of total 6 members out of which 3 members are officials of RBI and the rest are nominated by the central government for a period of 4 years.

With today’s hike in repo rate, the benchmark interest rate of the country stands at 5.4%.

MPC, which convened a meeting every two months, convened an off-cycle meeting in May 2022. In that meeting, the committee decided to increase the repo rate by 40 basis points (0.40%) to 4.40%. That was the first hike in the current financial year.

The second interest rate hike came in June 2022, when MPC raised the repo rate by 50 basis points to 4.90%. Friday’s hike is the third such move by the Reserve Bank of India. It also indicates that inflation still exists in the economy in such a way that monetary policies must be made stricter.

Governor of RBI, Shaktikanda Das, said during the announcement that the move to increase interest rate was part of the MPCs decision to keep inflation within the targeted numbers, without hindering the growth.

He also added that the inflation in consumer price index is still above levels of comfortability. The strong progression of south-west monsoon season and sowing of Kharif crops would be the key factors which drive the economy in a few weeks to come.

As the repo rate got adjusted, the standard deposit facility rate currently stands at 5.15%. Marginal Standing Facility rate and Bank rate also underwent adjustment, as both are currently at 5.65%.

Future rate hikes

The increasing inflation rate in the in global economic scenario, accumulation of strength by the US dollar and increasing volatility in international markets are impacting the Indian economy.

The move by MPC to hike the repo rate also gives hints that there would be more interest rate hikes in the current financial year. Economists and bankers believe that interest rates can go up as high as 5.75% by December 2022.

In between all the economic and geo-political challenges, the strong resilience and fundaments of the country will help India to become the fastest growing economy in the financial year 2023, the governor said.

Nilesh Shah, President & MD of Kotak Mahindra Asset Management Company, said that the recent rate hike by RBI is its plan to ensure the inflation rate comes below the 6% target by the last quarter of the current financial year.

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