India raises repo rate by 40 basis points as inflation bites

In a bid to tame the rising inflation in India, the Reserve Bank of India (RBI) has decided to raise the repo rate by 40 basis points to 4.40%, governor Shaktikanta Das announced in a virtual briefing on Wednesday.

Last month, the central bank kept two benchmark economy-wide interest rates unchanged at record lows, a signal that the RBI continued to prioritise growth recovery despite inflationary winds sweeping the world and India in the aftermath of the Russia-Ukraine conflict.

Repo rate refers to the rate at which commercial banks borrow money by selling their securities to the central bank, while reverse repo rate is the rate at which the central bank borrows money. These rates are key to boost credit and investments by businesses in the economy, as India's pushes its nascent economic recovery. The Monetary Policy Committee's (MPC) review of the economy is key to markets and general business sentiment.

"Shortages and volatility in commodities and financial markets are becoming more acute," Das said in his address from Mumbai.

"We have demonstrated in the MPC that we are not bound by a set book of rules but be accommodative of changing scenarios," he said.

Headline inflation in March stood at 6.95%, coming in above the RBI's comfort level of 6% for a third consecutive month.

In its last rate-setting meet, the central bank's six-member MPC voted to hold the repo and reverse repo rates at 4% and 3.5%, respectively. Such a policy approach is referred to as "accommodative stance", which means that it remains conducive for easier borrowing.

However, with today's upward revision, the RBI has turned to a so-called hawkish stance, which means that it could raise interest rates further as inflation begins to weigh in on the economy.

The central bank had revised the country's inflation forecast to 5.7% in FY23 from 4.5% earlier, acknowledging pressures of inflation from crude oil crossing $100/barrel. High inflation not only erodes the value of money and savings, but can also ultimately hurt growth itself.

Quarterly projections of the central bank show that the RBI expects 6.3% inflation in Q1, 5% in Q2, 5.4% in Q3 and 5.1% in Q4.

"The sky may be overcast, but we will use all our energies to let sunlight shine on India's future. It is the faith that steers us through stormy seas, moves mountains and jumps across the ocean," Das had said in his previous address.

Globally inflation is rising and high prices have found their way into the country through costlier oil. Rich economies are fast raising interests rates to tamp down high inflation.

Lower interest rates make borrowing by businesses and government easier, helping to increase the economy's output and GDP rate, but they can also fan inflation. The government, for instance, makes good a chunk of its fiscal deficit – the difference between the government's earnings and expenditure – by borrowing money by selling bonds.