New Delhi: In a surprise move, the Reserve Bank of India (RBI) Governor Shaktikanta Das on Wednesday, May 4, announced that the MPC voted unanimously to increase the policy repo rate by 40 basis points (bps) to 4.40% with immediate effect, citing persistent inflationary pressures in the economy.
This is RBI’s first increase in borrowing rates since August 2018.
Persistent inflation pressures are becoming more acute, RBI Governor Shaktikanta Das said in an online briefing, adding that there is a risk prices stay at this level for too long and expectations become unanchored.
The unscheduled statement comes ahead of the Federal Reserve’s rate decision on Wednesday, which is expected to see the US central bank’s most aggressive action to battle inflation in decades.
The yields on 10-year India bonds rose further to 7.36%, as compared to 7.11% in the previous day, while the benchmark stock indices Sensex and Nifty extended losses to nearly 2% in Wednesday’s afternoon deals.
The RBI turned hawkish in its April policy as inflation jumped, shifting focus from growth to inflation. Headline inflation stood at 6.95% in March, breaching the RBI’s comfort level of 6% for a third consecutive month. Economists expect price pressures to surge further in the coming months.
Rate cycle reverses
Despite the continuation of accommodative stance, today’s rate action confirms the reversal of the easy money regime the central bank had pursued during the start of the pandemic. In its response to the pandemic, monetary policy had shifted gears to an ultra-accommodative mode, with a large reduction of 75 basis points in the policy repo rate on March 27, 2020 followed by another reduction of 40 basis points on May 22, 2020.
However, in the April round of monetary policy, the central bank had signaled exit from the easy money stance with several liquidity management measures in alignment with the shift in the monetary policy stance, including restoration of a symmetric LAF corridor around the policy repo rate and the introduction of the standing deposit facility (SDF).
“These measures operationalise the primacy accorded to maintaining price stability, while keeping in mind the objective of growth. Monetary policy has to engender an environment in which inflation persistence is broken and inflation expectations are re-anchored,” Governor Das said in his statement.
Inflation worries return
The Governor stressed on the emerging risks of high inflation. Sustained high inflation inevitably hurts savings, investment, competitiveness and output growth, particularly that of poor segments, said Das.
“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,” Das said.
RBI Governor Statement Key Highlights:
.Interest rate hike aimed at strengthening, consolidating medium-term economic growth prospects: RBI Governor.
.Cash Reserve Ratio (CRR) raised by 50 bps to 4.50% effective May 21.
.Nine out of the 12 food subgroups registered an increase in inflation in the month of March.
.High-frequency price indicators for April indicate the persistence of food price pressures: RBI Governor Shaktikanta Das
.Standing Deposit Facility (SDF) adjusted to 4.15%, Marginal Standing Facility (MSF) to 4.65%
.The MPC raised the key lending rate or the repo rate by 40 basis points to 4.40%, Das announced
.Das said that the RBI has deployed both conventional & unconventional tools to support growth.
.Shortages, volatility in commodities and financial markets are becoming more acute: RBI Governor Shaktikanta Das
.We have demonstrated in the MPC that we are not bound by a set book of rules but be accommodative of changing scenarios, says Das
. Debt distress is rising in developing word, says Governor Das