The Reserve Bank of India (RBI) announced an increase in key interest rates by 40 basis points, the first increase since August 2018 and the sharpest in nearly 11 years, as it shifted gears to tame surging prices. Rising prices against the backdrop of the war in Ukraine and breakdown of supply chains have emerged as a key policy challenge, prompting central banks around the world to raise interest and tackle soaring prices. Hardening of both retail and wholesale inflation above the central bank's tolerance level has prompted the RBI to go in for a sudden rate hike aimed at protecting the growth recovery under way and shield consumers from the impact of surging prices of fuel and food.
Home loans and other retail loans as well as those availed of by businesses will get more expensive as around 40% bank credit is linked to the repo rate, which is what banks earn on the overnight funds that they park with the RBI.
The impact of smaller rate increases would have taken time to feed into the system and therefore the central bank seems to have opted for a higher than-expected increase in rates so that inflationary pressures are anchored. Smaller rate increases spread over several months would have also invited fresh criticism that the RBI had fallen behind the curve on reining in inflation.
