Following an emergency meeting, the Reserve Bank of India (RBI) raised the repo rate by 40 basis points to 4.40 percent with immediate effect on Wednesday.
The decision was made in response to rising inflation, geopolitical tensions, high crude oil prices, and global commodity shortages, all of which have impacted the Indian economy, according to RBI Governor Shaktikanta Das.
Mr Das said that "MPC judged that the inflation outlook warrants an appropriate and timely response through resolute and calibrated steps to ensure that second-round effects of supply-side shocks on the economy are contained and long-term inflation expectations are kept firmly anchored".
In his speech, the RBI Governor stated that food inflation is expected to remain high as a result of spillovers from global wheat shortages affecting domestic wheat prices, despite the fact that domestic supplies remain adequate.
Edible oil prices may firm up as a result of the Russia-Ukraine conflict, as major producing countries have imposed export restrictions, he said.
“The decision today to raise repo rate may be seen as reversal of rate action of May 2020. Last month, we had set out a stance of withdrawal of accommodation. Today's action needs to be seen in line with that action,” Mr Das said.
RBI also decided to remain accommodative while focussing on withdrawal of accommodation to ensure inflation remains within target going forward.
Bankers and analysts predict that interest rates on home, auto, and small business loans will rise in the coming months as banks pass on the impact of the repo rate hike to end borrowers.