RBI Increases Repo Rate By 40 Bps To 4.40 Percent

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

Following the unexpected move, the repo rate is now at 4.40 percent, effective immediately. As a result, the standing deposit facility (SDF) rate has been reduced to 4.15 percent, while the marginal standing facility (MSF) rate and the Bank Rate have been reduced to 4.65 percent.

“I would, therefore, like to emphasise that our monetary policy actions today aimed at lowering inflation and anchoring inflation expectations will strengthen and consolidate the medium-term growth prospects of the economy,” RBI governor Shaktikanta Das said.

The MPC, on the other hand, decided to remain accommodative while focusing on the withdrawal of accommodation to ensure that inflation remains within the target while supporting growth in the future. The rationale for raising benchmark rates in an off-cycle MPC meeting was the potential for upside risks to India’s inflation trajectory due to global factors.

In March, the headline inflation rate reached 7%, driven by food inflation as a result of the negative spillover effects of unprecedentedly high global food prices. Furthermore, high frequency price indicators for April indicated that food price pressures persisted. Concurrently, the direct impact of increases in domestic pump prices for petroleum products, which began in the second fortnight of March, is feeding into core inflation prints and is expected to have intensified in April.

As a result, the MPC felt it was necessary to reverse the rate action taken in May 2020, when the RBI reduced the policy repo rate by 40 basis points (bps), following a 75-bps reduction in March, as monetary policy had shifted to an ultra-accommodative mode due to the pandemic.

In another move, the RBI increased banks’ cash reserve ratio by 50 basis points to 4.5 percent of net demand and time liabilities (NDTL), effective May 21, 2022. This is expected to drain Rs 87,000 crore of liquidity from the system.

The RBI’s increase in the CRR is consistent with its policy of withdrawing accommodation and with its earlier announcement of a gradual withdrawal of liquidity over a multi-year time frame.

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