In an unscheduled meeting held on May 4, the Reserve Bank of India (RBI) governor Shaktikanta Das announced a hike in the benchmark lending rate by 40 basis points (bps) to 4.40 per cent in a bid to contain inflation, which has remained stubbornly above the target zone of 6 percent for the last three months.
RBI Governor said the monetary policy committee (MPC) held an unscheduled meeting from May 2-4 and voted to increase repo rates by 40 basis points.
The governor said, "Last month, we have announced our intention to withdraw accommodation to keep inflation within target. As we navigate through this difficult period, it is necessary to be sensitive to new realities."
"In these circumstances, it is necessary for monetary policy to focus on withdrawal of accommodation. MPC’s decision today may be seen as reversal of rate action of May 2020," Das said.
While the inflation has remained above the targetted 6 percent since January, RBI goveror said the inflation print in April is also likely to be high.
The retail inflation print for March stood at 6.9 percent.
By remaining accommodative, monetary policy continues to foster congenial financial conditions, the governor said.
The RBI in its April monetary policy had kept its benchmark lending rate unchanged at 4 percent since May 2020.
The Monetary Policy Committee (MPC) judged the inflation outlook and said it warrants an appropriate stance. The governor said the decision of MPC reversed the May 2020 interest rate cut by an equal amount.
In MPC's view, monetary policy response at this juncture would help preserve macrofinancial stability amidst increasing volatility in financial markets, the governor said.
The central bank had last revised its policy repo rate or the short-term lending rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting the interest rate to a historic low of 4 percent.
Das said recent GDP releases suggest global economy is losing pace.
There was a spike in March headline CPI, and April CPI is expected to elevate, said RBI Governor. “If this scenario unfolds it can deanchor expectations and impact growth,” he said, adding that the situation is dynamic and fast changes and actions have to be tailored.
The 10-year benchmark government bond witnessed a bloodbath as yield soared to 7.19 percent against 7.11 percent in the previous day with fear of a rate hike during the RBI governor’s speech.
The benchmark stock indices Sensex and Nifty extended losses to over 1 percent in noon deals. At 1.10 pm, the Sensex was down 669 points, or 1.2 percent, at 56,306 points. The broader Nifty lost 204 points, or 1.2 percent, at 16,864.
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The governor said the decision of MPC reversed the May 2020 interest rate cut by an equal amount.
The central bank had last revised its policy repo rate or the short-term lending rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting the interest rate to a historic low of 4 per cent.
