The Reserve Bank of India hiked its key lending rate by a more modest 35 basis points to 6.25 per cent, citing slowing inflation after three consecutive 50-bps (basis points) increases to manage price pressures that have remained persistently above the upper end of its target band.
The monetary policy committee (MPC), which is made up of three members from the RBI and three outside members, hiked the key lending rate, also known as the repo rate, by 0.35 per cent to 6.25 per cent with a five out of six majority.
The standing deposit facility rate and the marginal standing facility rate were also increased by the same quantum to 6.00 per cent and 6.50 per cent, respectively.
The RBI cited slowing price pressures for the smaller rate hike after consumer-price-based inflation eased to a three-month low of 6.77 per cent in October from a year ago.
That lines up with broad market expectations for a moderation in rate hikes given that the central bank had front-loaded its tightening policy, with predictions for inflation to have likely peaked in September and favourable base effects guiding the price rise trajectory to below 6 per cent from early next year.
"RBI's decision to increase the repo rate by 35 bps to 6.25 per cent is along the expected lines. The decision has been taken to tame inflation, which remains above 4 per cent. It's the fifth hike this year, which tells you how stubborn the inflationary trends have been. But the view is that inflation, while remaining high, is moderating, and the rates are somewhere close to their peak," said Adhil Shetty, CEO of Bankbazaar.com.
But RBI Governor Shaktikanta Das said inflation remains elevated and the battle against inflation has to continue as risks remain. The MPC's majority view is the withdrawal of an accommodative stance.
"Globally, inflation remains high and broad-based in the aftermath of the Russia-Ukraine war. Retail inflation projection retained at 6.7 per cent for FY23, and we will keep Arjuna's eye on evolving inflation dynamics," said the Governor.
That statement comes amid expectations that price pressures have likely peaked and concerns around economic growth resurfaced.
After a raise of 40 basis points in May and 50 basis points each in June, August and September, this is the fifth consecutive hike, taking the repo rate to the highest since April 2019.
Since May, the RBI has hiked the benchmark rate by a total of 2.25 per cent to reduce domestic retail inflation, which has consistently exceeded the central bank's upper end of its tolerance band of 2-6 per cent in each month this year.
While Wednesday's rate hike is only a smaller one, it will still weigh heavily further on the already stretched monthly household budgets dealing with higher borrowing costs and a rise in the price of almost everything.
Indian banks are certain to pass on the latest RBI rate hike to customers immediately, as seen in recent months, making loans costlier and leading to higher equated monthly instalments (EMIs).
"All consumer loans have become costlier this year. Borrowers are under the pressure of mounting interest and rising EMIs. Deposit rates, which haven't kept pace with the repo rate hikes, are now also spiking. As of December 2, 38 banks offered FD (fixed deposit) rates of 7.00 per cent or more on select tenors. Prepaying your home loan as and when funds are available can do wonders and shorten your ballooning loan tenor," added Mr Shetty, CEO of Bankbazaar.com.
The spate of relatively large rate hikes has sparked concerns that the battle against inflation could risk curbing economic growth as well, a view that has forced several top institutions to downgrade their India gross domestic product growth forecasts for this year and next, likely forcing the central bank's hand to pause hikes at some point.
The RBI lowered its growth projection for the current fiscal year to 6.8 per cent from 7.0 per cent in September.
But Mr Das said the Indian economy remains resilient and is seen as a bright spot in a gloomy world.
"Despite marginal downward revision in GDP growth to 6.8 per cent, India to remain fastest-growing major economy. In an interconnected world, we cannot remain entirely decoupled. The biggest risk remains headwinds from global geopolitical tensions," added the RBI Governor.