As expected earlier, the Reserve Bank of India's Monetary Policy Committee (MPC) in a 5:1 decision increased the repo rate by 50 basis points to 5.90 on Friday.
The RBI Governor Shaktikanta Das, heading the MPC, announced the hike to subdue the inflation.
"Based on an assessment of the macroeconomic situation and its outlook, the MPC decided by a majority of five members out of six to increase the policy repo rate by 50 basis points to 5.9 per cent, with immediate effect," Das said.
The Monetary Policy Committee (MPC) met on September 28, 29 and 30.
Explaining the rationale for hiking the policy rate, Das said the global economic outlook is bleak, recession fears are mounting, financial condition is tightening and inflation is high across the jurisdictions.
"Emerging market economies (EMEs), in particular, are confronted with challenges of slowing global growth, elevated food and energy prices, spillovers from the advanced economy policy normalisation, debt distress and sharp currency depreciations, " he added.
On the gross domestic product (GDP) growth, Das said the real GDP grew by 13.5 per cent (y-o-y) in Q1 in 2022-23, surpassing the pre-pandemic level by 3.8 per cent.
This was led by robust growth in private consumption and investment demand.
According to him, the real GDP growth for 2022-23 is projected at 7 per cent.
On inflation, Das said the global geopolitical developments are weighing heavily on the domestic inflation trajectory. Inflation inched up to 7 per cent in August from 6.7 per cent in July.
Pointing out the upside risk in food prices, Das said cereal price pressure is spreading from wheat to rice due to the likely lower kharif paddy production.
The delayed withdrawal of monsoon and intense rain spells in various regions have already started to impact vegetable prices, especially tomatoes.
These risks to food inflation could have an adverse impact on inflation expectations.
The hike in repo rate is expected to increase the burden on existing and new borrowers. All cars, home, personal loans on a floating rate of interest will rise.