Fourth Time in a Row, RBI Hikes Benchmark Lending Rate 50bps to Check Inflation

Mumbai: The Reserve Bank of India (RBI) on Friday raised the benchmark lending rate by 50 basis points to 5.90% in a bid to check inflation, which has remained above its tolerance level for the past eight months.

With the latest hike, the repo rate or the short-term lending rate at which banks borrow from the central bank is now close to 6%.

This is the fourth consecutive rate hike after a 40 basis points increase in May and 50 basis points hike each in June and August. In all, RBI has raised benchmark rate by 1.90% since May this year.

The six-member Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das decided in favour of the rate hike.

The Consumer Price Index (CPI) based inflation, which RBI factors in while fixing its benchmark rate, stood at 7% in August. Retail inflation has been ruling above the RBI's comfort level of 6% since January this year.

Das retained the inflation projection at 6.7% for the current fiscal while slashing real GDP growth estimate to 7% from earlier forecast of 7.2% for FY'23.

The latest RBI action follows the US Federal Reserve effecting the third consecutive 0.75 percentage point interest rate increase, taking its benchmark rate to a range of 3-3.25% earlier this month.

Inflation Projection

RBI Governor Shaktikanta Das said the impact of inflation globally is weighing heavily on the domestic market.

For September quarter of 2022-23, RBI projected retail inflation at 7.1% .

For third quarter, inflation is estimated at 6.5% and further down to 5.8% in March quarter with risks evenly balanced, the governor said.

For first quarter of next fiscal year, retail inflation is forecast at 5%. T

The central bank has the mandate to keep retail inflation in a band of 2-6%.

GDP Forecast Slashed

The central bank slashed the growth projection to 7% for the current fiscal from the earlier forecast of 7.2%, citing aggressive tightening of monetary policies globally and moderation in demand.

Real GDP growth in the first quarter of the current fiscal was 13.5%.

Das, however, cautioned that there is a third wave of shock globally triggered by aggressive monetary policy tightening to curb inflation.

The central bank in April slashed the real GDP growth projection to 7.2% from its earlier forecast of 7.8% for 2022-23.

Key Highlights of Monetary Policy

*Benchmark interest rate hiked by 50 basis points to 3-year high at 5.90%.

*Economic growth projection for FY23 cut to 7% from 7.2% estimated in August

*GDP expected to grow at 6.3% in September quarter, 4.6% each in December and March quarters.

*Inflation projection retained at 6.7% for ongoing fiscal year (FY23)

* Inflation to remain above upper tolerance limit of 6% till December

*Average crude oil price for Indian basket expected at $100 per barrel

*Forex reserve down 67% at $537.5 billion as of September 23 this year