In a surprise move, RBI raises repo rate by 40 bps to 4.40 per cent

The RBI MPC voted unanimously to increase the benchmark rate, said Governor Shaktikanta Das

The central bank’s monetary policy committee (MPC) on Wednesday voted unanimously to increase repo rate by 40 basis points (bps) in an off-cycle meeting to tame inflation, which has remained elevated for some time now. The repo rate has been increased for the first time since August 2018.

The repo rate, after the surprise move, now stands at 4.40 per cent, with immediate effect. Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15 per cent; and the marginal standing facility (MSF) rate and the Bank Rate to 4.65 per cent.

The MPC, however, decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

The rationale behind raising benchmark rates in an off-cycle MPC meeting was the upside risks to India’s inflation trajectory because of global factors.  

The headline inflation number in March had touched 7 per cent, driven by food inflation due to the impact of adverse spill overs from unprecedented high global food prices. Further, high frequency price indicators for April have indicated the persistence of food price pressures. Simultaneously, the direct impact of the increases in domestic pump prices of petroleum products--beginning the second fortnight of March – is feeding into core inflation prints and is expected to have intensified in April.

Hence the MPC thought it was necessary to reverse rate action taken in May 2020, where the RBI reduced the policy repo rate by 40 bps, following 75 bps reduction in March, as monetary policy had shifted to an ultra-accommodative mode because of the pandemic.

In another move, the RBI has hiked the cash reserve ratio of banks by 50 basis points to 4.5 per cent of net demand and time liabilities (NDTL), effective from the fortnight beginning May 21, 2022. This is expected to withdraw liquidity to the tune of Rs 87,000 crore from the system.

The increase in CRR by RBI is in line with its stance of withdrawal of accommodation and in line with its earlier announcement of gradual withdrawal of liquidity over a multi-year time frame.