The Monetary Policy Committee hiked the repo rate by 50 basis points to 4.90% to combat high inflation, Reserve Bank of India governor Shaktikanta Das said on Wednesday.
In response to the news, BSE Sensex fell over 400 points and NSE Nifty fell below 16,350. However, markets were quick to recoup the sudden losses, with benchmarks trading 0.4% lower.
The benchmark 10-year government bond yield was unchanged at 7.52%.
The standing deposit facility, which represents the lower end of the interest rate band, was increased to 4.65% from the previous 4.15%.
The MPC remains committed to bringing consumer price inflation on target and unanimously voted to focus on housing redemptions, Das said.
The MPC's interest rate actions were in line with market expectations. A survey of 23 respondents had forecast a rate hike of 25 to 50 basis points, with nearly half expecting a 50 basis point hike.
Das said that as inflationary pressures become more widespread, CPI inflation
is likely to stay above the RBI's 2-6% range for the first three quarters of the current fiscal year.
More monetary policy action is needed to anchor inflation expectations, he said.
However, the RBI governor said recent government action, such as cutting excise taxes on fuel, has resulted in a significant drop in households' inflation
With the global surge in crude oil following Russia's invasion of Ukraine in late February, upside risks to inflation have increased significantly in India as the country imports more than 80% of its fuel needs.
CPI inflation hit an eight-year high of 7.79% in April, well above the MPC's 2-6% range. The medium-term target for the price indicator is 4 percent. INFLATION, GDP PROJECTIONS
As markets expected, the RBI raised inflation forecasts sharply, with CPI inflation for the current year now at 6.7%.
CPI inflation is 7.5% in April-June, 7.4% in July-September, 6.2% in October-December and 5.8% in January-March, Das said. .
In its April policy, the MPC forecast headline retail inflation at 5.7% for the current fiscal year, with April-June at 6.3%, July-September at 5.8%, October- December at 5.4% and January-March at 5.1%.
The RBI Governor said the GDP growth forecast for the current financial year remained at 7.2%.
In April, the MPC forecast real GDP growth of 7.2% for 2022-23 (April-March), 16.2% for the first quarter, 6.2% for the second quarter and 4.1% for the third quarter and fourth quarter at 4%. .Also Read: What is Repo rate and Reverse Repo rate? What is its implications!