The Reserve Bank of India (RBI) Wednesday raised the key policy interest rate by half a percentage point to put a lid on seemingly all-pervasive price pressures, signalling sustained monetary tightening as its future course of action after estimating that fiscal year-end inflation would breach the upper tolerance threshold prescribed by law.

Six members of the Monetary Policy Committee (MPC) voted unanimously for the second straight time to raise the repo rate, the rate at which it lends to banks, and to focus on withdrawal of an accommodative monetary policy.

Repo rate goes up by 50 basis points, to 4.9 percent. All other rates such as the reverse repo rate, the rate it pays banks for parking excess funds, moved higher by the same proportion. A basis point is 0.01 percentage point.

After skipping inflation forecast in its off-cycle meeting last month, the RBI has raised it by 100 basis points to 6.7 percent for the full fiscal year, from 5.7 percent it forecast in April. This is the second bump up in as many months after a 120-basis-point increase in the first move.

“Inflationary pressures have become broad-based and remain largely driven by adverse supply shocks. There are growing signs of a higher pass-through of input costs to selling prices,’’ said Governor Shaktikanta Das. “Further monetary policy measures are necessary to anchor the inflation expectations.’’

An ET poll suggested the policy repo rate could be increased by 25-50 basis points with nearly half the 23 market participants forecasting a 50-basis-point increase, while the others expected it to be between 25 and 40 basis points.

Governor Das shocked investors last month with a 40-basis-point increase in rates in an off-cycle meeting after maintaining status quo in the April meet, though he pushed inflation ahead of growth in the MPC consideration. With inflation gathering pace across the globe due to geopolitical tensions and supply disruptions, the economists believe future increases could be sharper.

“To knock high inflation out of the park, central banks are having to step out of the crease and come out swinging with tight monetary policy,” said Aurodeep Nandi, economist at Nomura Securities. “Today’s hike by 50 basis points on the top of an inter-meeting 40-basis-point hike in May is reflective of inflation elbowing its way to the top of the RBI’s priority list and it belatedly looking to catch up with the curve.”

Investors cheered with the benchmark bond yields falling 7 basis points to 7.45 in the absence of more tightening measures. Equities soared with the Sensex climbing 0.6 percent to 55,419.

The central bank promised enough liquidity to ensure sufficient credit for corporates even though it absorbed nearly Rs. 83,711 crores by increasing the Cash Reserve Ratio (CRR), the proportion of deposits banks keep with the RBI. One third of the ET poll participants suggested it could be raised again from 4.5%, but the central bank kept it unchanged Wednesday after the banking industry group lobbied for it.

Source link