The Reserve Bank of India has raised its key lending rate by 40 basis points (0.4 percentage point) to 4.40% with immediate effect, the central bank announced in its monetary policy statement on May 4.
The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth, it said in the statement.
Analysts were expecting a rate hike after the retail inflation hit nearly 7% in March.
“The persistence of high crude oil prices, and uncertainty over the length of the Russia-Ukraine war, have resulted in sustained inflationary pressure globally. With the Chinese and Japanese currencies depreciating 4% and 6% respectively last month, emerging market currencies are under pressure,” said Prasenjit Basu – Chief Economist, ICICI Securities.
“Although the rupee has depreciated only 1.1% in the past month, any further downward pressure on the rupee would spark greater worries about imported inflation, so a timely rate hike was needed ahead of the inevitable US rate hike expected this week,” he added.
If the Russia-Ukraine war persists beyond May and June, more rate hikes will be needed, Basu expects.
International crude oil prices remain high but volatile, posing considerable upside risks to the inflation trajectory through both direct and indirect effects, RBI said in its monetary policy report.
Core inflation is likely to remain elevated in the coming months, reflecting high domestic pump prices and pressures from prices of essential medicines. Renewed lockdowns and supply chain disruptions due to resurgence of COVID-19 infections in major economies could sustain higher logistics costs for longer. All these factors impart significant upside risks to the inflation trajectory set out in the April statement of the MPC, the central bank said.
All members of the MPC –Shashanka Bhide, Ashima Goyal, Jayanth R. Varma, Rajiv Ranjan, Michael Debabrata Patra and Shaktikanta Das – unanimously voted to increase the policy repo rate by 40 basis points.