Reserve Bank of India (RBI) Governor Shaktikanta Das on Wednesday, 4 May, announced that the Monetary Policy Committee (MPC) has voted to increase policy repo rate by 40 basis points to 4.40 percent. The Cash Reserve Ratio (CRR) has been raised by 50 basis points to 4.50 percent, effective from 21 May.
"Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15 percent and the marginal standing facility (MSF) rate and the Bank Rate to 4.65 percent," the RBI said in a statement.
The hiking of the benchmark interest rate comes in an unscheduled policy review with a view to contain inflation.
"The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth."RBI
This comes after the committee held an unscheduled rate review meeting from 2 to 4 May.
Geopolitical Tension Pushing Inflation: RBI
Geopolitical tensions, stabilisation of economic activity since the ebbing of the third COVID-19 wave, and rise in food inflation were among the factors cited by the RBI for its decision.
"Since the MPC’s meeting in April 2022, disruptions, shortages and escalating prices induced by the geopolitical tensions and sanctions have persisted and downside risks have increased," the central bank said in a statement.
The interest rate hike is aimed at strengthening and consolidating medium-term economic growth prospects, the RBI governor said, pointing out that geopolitical tension was pushing inflation.
"The MPC is of the view that while economic activity is navigating the vortex of forces confronting the world with resilience on the strength of underlying fundamentals and buffers, the risks to the near-term inflation outlook are rapidly materialising... In this milieu, the MPC expects inflation to rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second round effects," the statement issued by the RBI noted.
Speaking about the hike in CRR, Das said that the withdrawal of liquidity through this increase in the CRR would be of the order of Rs 87,000 crore.
Shortages and volatility in commodity and financial markets are becoming more acute, Governor Das said, adding that both conventional and unconventional tools have hence been deployed to support growth.
However, the monetary policy still remains accommodative and careful, while calibrated withdrawal of pandemic-related measures will be undertaken, Das added.
Responding to the RBI governor's announcement, Sensex dropped by over 900 points, while Nifty fell below 16,800.
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