RBI turns hawkish, ups repo rate by 40 bps ‘to tackle inflation’

Reserve Bank of India Governor Shaktikanta Das digitally delivers a statement. | Photo Credit: -

Mumbai, May 4

In a surprising move, the monetary policy committee (MPC) on Wednesday unanimously voted to raise the policy repo rate by 40 basis points from 4 per cent to 4.40 per cent with immediate effect, in a clear indication that inflation may be spiraling into higher levels than anticipated.

The move, ahead of the US Fed announcement on rate hike, also puts the RBI in the lead for the time being after being blamed for being behind the curve.

The six-member rate-setting committee decided to up the repo rate, which has been rock steady since May 22, 2020, as synchronised shocks of commodity prices, supply disruptions and higher inflation unleashed by the Russia-Ukraine war have shifted the future trajectory of inflation upwards. “As several storms hit together, our actions today are important steps to steady the ship,” explained RBI Governor Shaktikanta Das

The MPC also decided unanimously to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target (4 per cent, with a +/-2 per cent tolerance band) going forward, while supporting growth.

Hike in CRR

This off-cycle rate hike move, along with the increase in the cash reserve ratio (CRR) by 50 basis points (bps) from 4 per cent to 4.50 per cent, is expected to gradually push up lending and deposit rates. Withdrawal of liquidity through this increase in CRR, which was last increased from 3.50 per cent to 4 per cent on May 22, 2021, would be of the order of ₹87,000 crore.

As several storms hit together, our actions today are important steps to steady the ship,” said Das.

Analysts’ say the repo rate hike may also be to stem capital outflows as well as depreciation of the rupee at a time when monetary policy authorities in major advanced economies have embarked on rate increases and quantitative tightening.. The last time this rate was hiked was on August 1, 2018, when it was revised from 6.25 per cent to 6.50 per cent.

Elevated inflation: Collateral risk

Referring to the spike in the headline CPI (consumer price index based) inflation in March, 2022 (which was propelled, in particular, by food inflation) to 7 per cent from 6.1 per cent in the preceding month, Das said the print for April is also expected to be elevated.

“There is the collateral risk that if inflation remains elevated at these levels for too long, it can de-anchor inflation expectations which, in turn, can become self-fulfilling and detrimental to growth and financial stability. Hence, we must remain in readiness to use all policy levers to preserve macroeconomic and financial stability while enhancing the economy’s resilience,” said Das.

More rate hikes expected

Dharmakirti Joshi, Chief Economist, and Pankhuri Tandon Economist, Crisil, observed that the monetary policy measures show that the RBI’s policy of gradual normalisation has come to an end.

“A sharp rise in inflation outlook for this fiscal, along with increasing pace of monetary policy tightening by major global central banks have significantly reduced the policy space the MPC had. .We expect the RBI to hike the repo rate by another 75-100 bps this fiscal. The hikes are likely to be frontloaded, given that inflationary pressures remain significantly high at present,” Joshi said.

Industry surprised

Rajkiran Rai G, MD & CEO of Union Bank of India, said: “This (rate hike) was expected, but the timing is a bit surprising. We have lot of repo rate (external benchmark rate)-linked loans. So, all those loans will be repriced now. The deposit cost for a bank goes up when the liquidity in the system goes down. Now, with the liquidity going out of the system, banks will start increasing the deposit rates.”