On May 4, in an unscheduled meeting, the Reserve Bank of India governor Shaktikanta Das announced a 40 bps hike in repo rates.
Das said the MPC had voted to increase the repo rate by 40 basis points, citing persistent inflationary pressures in the economy.
Retail inflation in India has jumped to a 17-month high
The RBI’s repo rate has been kept unchanged at 4 percent since May 2020.
The governor said, "In a unscheduled but not entirely unexpected announcement, the MPC of RBI has announced a hike in repo rate and in all other benchmark rates by 40 bps. Further, the CRR has also been increased by 50 bps to indicate a reversal of the easy liquidity scenario."
The Monetary Policy Committee (MPC) headed by RBI Governor also raised the amount of deposits banks are required to maintain a cash reserve by 50 bps to 4.5 percent to suck out Rs 87,000 crore of liquidity from the banking system.
The CRR hike will be effective from May 21.
This is the first-rate hike since August 2018 and the first instance of the MPC making an unscheduled increase in the rate rate. The MPC unanimously voted for a rate hike while maintaining the accommodative stance.
While the inflation has remained above the targetted 6 percent since January, Das said the inflation print in April is also likely to be high.
The retail inflation print for March stood at 6.9 percent.
The governor said the MPC decision 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 percent.
The announcement comes days after the 595th meeting of the Central Board of Directors of the Reserve Bank of India. On Monday, the central board of the RBI approved the nomination of Rajiv Ranjan as a member of the MPC. Ranjan replaced Mridul Saggar, who retired on April 30. Ranjan is the third internal member (ex-officio) of the MPC. The next monetary policy meeting is scheduled for June 6-8.
In the last MPC meeting, it was decided to stick to an accommodative stance ''while focussing on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth''.
What is repo rate?
The repo rate is the rate at which commercial banks borrow from the RBI by selling security such as Treasury Bills to the central bank.
Why does RBI do that?
Commercial banks can borrow money from the RBI in case of a cash crunch. The collateral is the Treasury Bills that commercial banks sell to the RBI, and the interest rate of borrowing is called the Repo Rate.
Repo rate affect the borrowing banks and people like you and me who borrow from banks.
What happens when repo rates are hiked?
The RBI today announced repo rate has been increased by 40 bps. To compensate for a high cost of borrowing, banks will, in turn, charge a higher interest rate from their borrowers. As a result, loans will become expensive for citizens. The bank increase interest rates on loans will go up. Brace for higher interest rates on home loans, auto loans etc.
Expert view
Rajiv Shastri, Director and CEO, NJ AMC
Over recent days, inflation has shown an upward trend which was caused by supply disruptions in food, oil and other commodities. However, the impact of these has now moved to the entire economy which resulted in core inflation being sustained at high levels as well. This rate hike is an attempt to control this secondary inflation which can become sticky and persist even after commodity prices moderate. It's a preventive measure and not a reactive one.
