RBI hikes rates to tame inflation

RBI hikes rates to tame inflation

The decision was also taken in view of the mounting geo-political tensions, high crude oil prices and shortage of commodities globally, which have impacted Indian economy

BUSINESS DESKUpdated: Wednesday, May 04, 2022, 11:17 PM IST
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Mumbai: Reserve Bank of India Governor Shaktikanta Das digitally delivers a statement. | (PTI Photo)

BENGALURU: Home, auto and other loan EMIs are likely to go up after the Reserve Bank of India hiked its key interest rate by 40 bps in a surprise move on Wednesday, in an effort to tame inflation that has remained stubbornly above target in recent months.

The decision was also taken in view of the mounting geo-political tensions, high crude oil prices and shortage of commodities globally, which have impacted Indian economy.

The increase in repo rate -- the rate at which the RBI lends to commercial banks -- to 4.40 per cent from a record low of 4 per cent is the first since August 2018. It is also the first instance of the RBI monetary policy committee holding an unscheduled meeting.

This would increase the cost of borrowing for corporate entities as well as individuals. The latest surprise hike completely reverses the Covid-support off-cycle rate cut in May 2020.

The RBI has also hiked the cash reserve ratio (CRR) by 50 basis points to 4.5 per cent; this means banks will have to now park more money with the central bank, leaving them with less to lend to consumers. This would drain Rs 87,000 crores of liquidity from the banking system, Governor Shaktikanta Das said in a video address.

The RBI's off-cycle move has also come ahead of a widely-expected 50 basis points hike by US Federal Reserve later on Wednesday

SENSEX PLUMMETS: The repo rate hike accompanied with an increase in the cash reserve ratio was a "double whammy" for the markets with the BSE benchmark Sensex sinking 1,306.96 points, or 2.29 per cent, to settle at 55,669.03. This resulted in market capitalisation of BSE-listed firms eroding from Rs 6,27,359.72 crores to settle at Rs 2,59,60,852.44 crores.

The MPC has retained its accommodative monetary policy stance -- meaning it can cut interest rates to support growth -- at a time when globally inflation is rising alarmingly. Persistent inflation pressures are becoming more acute, particularly on food, the Governor said, adding that there is a risk if prices stay at this level for "too long" and expectations become unanchored.

"Inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth," he said.

Increases in fuel and food prices, exacerbated by the war in Ukraine and sustained pandemic-related supply chain disruptions, have been above the RBI comfort zone of 2-6 per cent for three months in a row. Headline inflation in March rose to a 17-month high of 6.95 per cent and it may be above the target band in April too.

The MPC is scheduled to meet on June 8 and analysts expect it to again raise the repo rate by at least 25 bps.

BLURB:

In his address, the RBI Governor noted that food Inflation is expected to remain high as spillovers from global wheat shortages are impacting domestic prices, even though domestic supplies remain comfortable. Due to the Russia-Ukraine war, edible oil prices may also firm up as major producing countries have imposed export restrictions. Retail inflation hit nearly 7 per cent in March and held above the upper end of the RBI's target band of 2-

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