The Reserve Bank of India (RBI) has increased the repo rate by 50 basis points and more rate hikes are expected in the coming months as inflation has stayed stubborn. This is the fourth rate hike since May this year.

The central bank also lowered the growth forecast to 7% for the current financial year from 7.2% in August with the global economic outlook being bleak. The retail inflation forecast, however, has been retained at 6.7%.

 The RBI has raised the key policy rate by 190 basis points since May, prompting banks to increase lending and deposit rates. This is the third straight time that the RBI’s monetary policy committee (MPC) has raised the repo rate by 50 basis points. A basis point is one hundredth of one percentage point.

 The six-member MPC, headed by the RBI Governor Shaktikanta Das, also decided to remain “focused on withdrawal of accommodation” to ensure that inflation remains within the target going forward, while supporting growth.

“The MPC was of the view that persistence of high inflation necessitates further calibrated withdrawal of monetary accommodation to restrain broadening of price pressures, anchor inflation expectations and contain the second-round effects. This action will support medium-term growth prospects… Accordingly, the MPC decided to increase the policy repo rate by 50 basis points to 5.9% and to remain focused on withdrawal of accommodation, while supporting growth,” Das said while announcing the monetary policy on 30 September.

 The hike has triggered banks to raise lending rates. Borrowers with loans linked to the external benchmark linked lending rate (EBLR) will immediately feel the pinch. For borrowers linked with the marginal cost of funds-based lending rate (MCLR), the resetting of rates will happen with a lag.

The Indian rupee has been sliding while the US Federal Reserve  recently announced a 75-basis point hike and indicated more increases in future.

 Das said domestic factors will always be the RBI’s guiding force. “There are two components in the monetary policy framework – inflation and growth. The MPC’s decisions are based on the twin objective, with primacy given to price stability driven by the necessity to keep growth in mind,” he told reporters during the post-policy press conference.

 “Other than that, currency market fluctuations, depreciation or appreciation of the rupee is not a factor for consideration of the MPC. For dealing with those situations, the RBI has other instruments which will be deployed as per requirement,” he added.

The RBI Governor expressed concern over growth. “The headwinds from extended geopolitical tensions, tightening global financial conditions and possible decline in the external component of aggregate demand can pose downside risk to growth,” Das said in his speech. Despite the geopolitical tensions, the underlying fundamentals of India are resilient and the buffers built over the years have helped in dealing with any external shock, he said adding that even the financial sector is displaying improved performance parameters on provision coverage ratio, asset quality and capital adequacy front.

Das said the liquidity situation is in surplus and the RBI will continue with its two-way fine-tuning operations for injection as well as absorption of liquidity.

Das said about 67% of the decline in reserves during the current financial year is due to valuation changes arising from an appreciating US dollar and higher US bond yields. Since January till date, the country’s foreign exchange reserves have fallen by $95.218 billion.

“During the current financial year (up to September 28), the US dollar has appreciated by 14.5% against a basket of major currencies. It (rupee) has depreciated by 7.4% against the US dollar during the same period – faring much better than several reserve currencies as well as many of its EME and Asian peers,” he said.

The rupee is a free floating currency and its exchange rate is market-determined. “The RBI does not have any fixed exchange rate in mind. It intervenes in the market to curb excessive volatility and anchor expectations,” the RBI Governor said.