RBI hikes repo rate by 40bps to 4.40%, CRR by 50bps, cites inflation worries

This is the first such unscheduled statement from the RBI governor since the start of the pandemic in 2020

File Photo of RBI Governor Shaktikanta Das

Reserve Bank of India (RBI) Governor Shaktikanta Das announced a 40-basis-point hike in the key lending rate and raised the cash reserve ratio (CRR) by 50 basis points in an unscheduled announcement on May 4. The move surprised markets pushing Benchmark Sensex down by 1474 points in the intra-day trade and pushing the yield on India’s benchmark 10-year bond to 7.38 per cent.

One basis point is one hundredth of a percentage point. The revised repo rate now stands at 4.40 percent and the CRR at 4.5 percent.

Today’s decision should be seen as part of the central bank’s announcement last month of gradual withdrawal from easy money regime, Das said. “The decision today to raise repo rate may be seen as reversal of rate action of May 2020. In last month, we had set out a stance of withdrawal of accommodation. Today’s action need to be seen in line with that action.”

The surprise move came ahead of an expected rate hike from the US Federal reserve and in the backdrop of retail inflation persistently staying above the central bank’s comfort zone.

This is the first such unscheduled statement from the RBI governor since the start of the pandemic in 2020. The announcement surprised the markets, pushing up bond yields and putting pressure on the equity indices.

Repo is the rate at which the central bank lends short-term funds to banks. The RBI has cut the repo rate by 250 basis points since February 2019 to help revive the growth momentum. The Monetary Policy Committee has been on a prolonged accommodative stance to support growth.

In that sense, today’s announcement confirms the clear reversal of the rate cycle.

Source: https://www.moneycontrol.com/news/business/rbi-stuns-market-with-40bps-hike-in-repo-rate-to-4-40-cites-inflation-worries-8450721.html