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India's central bank on Friday hiked its key repo rate by 50 basis points to 5.4%, bringing borrowing costs back to pre-pandemic levels as it cited spillovers from geopolitical shocks as a major factor of considerable uncertainty in the inflation trajectory.
Markets had forecast the Reserve Bank of India's rate hike to be just 35 basis points.
The bank also increased its standing deposit facility (SDF) rate by 50 basis points to 5.15% and its marginal standing facility (MSF) rate and bank rate by the same amount to 5.65%.
"The global economic and financial environment has deteriorated with the combined impact of monetary policy tightening across the world and the persisting war in Europe heightening risks of recession," it said in its latest monetary report.
The bank expects cost pressures to be increasingly transmitted to output prices in the manufacturing and services sectors.
It added that the annual inflation rate in India had diminished to 7.01% in June of from 7.04% in the previous month, but remains above the upper tolerance band.
The bank maintained its inflation forecast for 2022 and 2023 at 6.7% and economic growth projection at 7.2%.
"Domestic economic activity remains resilient ... the south-west monsoon rainfall was 6 per cent above the long period average. High frequency indicators of activity in the industrial and services sectors are holding up," it said.
It added that urban demand was strengthening, with rural demand gradually catching up. -
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