RBI Raises Repo Rate By 40 Basis Points To 4.40 Per Cent To Check Inflation

Repo Rate Hiked: Das said that the cash reserve ratio will also be increased to 50 basis points to 4.5 per cent with effect from May 21, which in turn will lead to withdrawal of Rs 87,000 crore

New Delhi: In an unscheduled policy review meeting of its Monetary Policy Committee (MPC), the Reserve Bank of India (RBI) on Wednesday hiked the policy repo rate under the liquidity adjustment facility (LAF) by 40 basis points to 4.40 per cent to contain inflation with immediate effect.

According to the RBI statement, the standing deposit facility (SDF) rate consequently stands adjusted to 4.15 per cent and the marginal standing facility (MSF) rate and the bank rate to 4.65 per cent.

Governor Shaktikanta Das in his speech on Wednesday said the MPC also decided to remain accommodative, while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

Das said that the cash reserve ratio (CRR) will also be increased to 50 basis points to 4.5 per cent with effect from May 21, which in turn will lead to withdrawal of Rs 87,000 crore. CRR is a percentage of a bank's total deposits that it needs to maintain as liquid cash.

According to the governor, since the MPC’s meeting in April 2022, disruptions, shortages, and escalating prices induced by the geopolitical tensions and sanctions have persisted and downside risks have increased.

"The International Monetary Fund (IMF) has revised down its forecast of global output growth for 2022 by 0.8 percentage point to 3.6 per cent in a span of less than three months. The World Trade Organization (WTO) has scaled down projection of world trade growth for 2022 by 1.7 percentage points to 3.0 per cent," said Das.

This is the first rate hike by the central bank since August 2018.

The RBI, however, decided to continue with accommodative monetary policy stance as all the six members of the MPC unanimously voted for the rate hike. 

After the announcement of rate hike, the yield on 10-year benchmark bond spiked 7.4 per cent.

The development comes as inflation has remained above the target zone of 6 per cent for the past three months, while the retail inflation for March stood at 6.9 per cent.

During the announcement, the governor mentioned about geopolitical tension because of the ongoing conflict between Russia and Ukraine which was pushing up the inflation. "Global economic recovery is losing momentum, he added.

According to news reports, many analysts have said that the quantum of rate hike and the timing have surprised the markets. 

In its first monetary policy review of FY23 on April 8, the MPC maintained the repo rate, or short-term lending rate, for commercial banks, at 4 per cent.

The Rerserve Bank had last revised its policy repo rate on May 22, 2020, in a bid to boost demand by cutting the interest rate to a historic low of 4 per cent.