RBI takes repo rate hike route | Will it reach desired destination?

The Reserve Bank of India (RBI) has hiked repo rate to tackle inflation. However, the question remains whether the central bank will be able to achieve its desired results or not.

The Reserve Bank of India (RBI) has hiked the key interest rate by 50 basis points, the second increase in five weeks, to tame inflation. The increase in lending rate or the repurchase rate (repo) by 50 bps to 4.90 per cent was the biggest in more than a decade and came on the back of a 40 bps hike in May at an unscheduled meeting that kicked off the tightening cycle.

The RBI's six-member Monetary Policy Committee (MPC), which met from May 6-to 8, unanimously voted to increase the policy repo rate to 4.90 per cent. RBI Governor Shaktikanta Das said the MPC's decision to increase the repo rate by 50 basis points (bps) and focus on withdrawal of accommodation are calibrated to the evolving inflation-growth dynamics.

Along with a hike in the repo rate, the RBI also revised upwards its inflation projection to 6.7 per cent for the financial year 2022-23 from an earlier projection of 5.7 per cent made in April.

Das said around 75 per cent increase in the inflation projection is attributed to food inflation.

"By and large, if you look at it (inflation), excepting factors like tomato prices slightly going up or some domestic electricity tariff being revised up by some states, primarily the food inflation spike is linked to external factors, namely the war in Europe," Das said.

The governor said the forecast on inflation is the baseline scenario without factoring in the steps taken by the RBI.

"We believe that our actions will have their impact in bringing down inflation and inflation expectations. Our endeavour will be to move closer to the target and the target is 4 per cent, plus/minus 2 per cent on either side. So that target of 4 per cent does remain," he said.