The central bank raised interest rates on Tuesday as inflation has remained above 10% for the past five months. The Reserve Bank of India (RBI) stated that it would continue to normalise its monetary policy stance in line with prevailing growth and inflation conditions in the economy.
The RBI increased the repo rate, the rate at which it lends to banks, by 25 basis points to 5.75%, a move that was largely in line with market expectations. However, it raised the reverse repo rate, the rate at which it absorbs excess liquidity from the banking system, by a steeper-than-expected 50 basis points to 4.50%.
The central bank kept the cash reserve ratio (CRR) unchanged at 6%.
Inflationary pressures in India first intensified last year following a weak monsoon, which led to a sharp rise in food prices. Since then, inflation has spread across the broader economy. This has triggered public concern and protests, particularly as a significant portion of the population is dependent on agriculture and is sensitive to rising prices.
New Delhi’s decision to increase fuel prices is expected to add nearly one percentage point to Wholesale Price Index (WPI) inflation starting in July. This move also prompted opposition parties to call for a one-day nationwide strike earlier this month.
The government is relying on a normal summer monsoon to improve crop yields and ease pressure on food prices. It has indicated that inflation could decline to around 6% by December, which, in my view, remains a challenging task.
RBI raised repo and reverse repo rates to tackle persistent inflation while keeping CRR unchanged, signalling continued monetary policy normalisation.
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