RBI Governor Shaktikanta Das
Highlights
- This is the first-rate hike by the RBI since August 2018
- The next meeting of the MPC is scheduled during June 6-8
- Das said that MPC voted unanimously to maintain an accommodative stance
The Reserve Bank of India (RBI) on Wednesday announced to hike the repo rate by 40 basis points and cash reserve ratio (CRR) by 50 basis points in an unscheduled policy review. One basis point is one-hundredth of a percentage point.
Accordingly, the repo rate now stands at 4.40 per cent and the CRR at 4.50 per cent. The repo rate is the rate at which the central bank lends money to commercial banks while the CRR is a certain minimum amount that banks have to deposit as reserves with the central bank.
Addressing a press conference in Mumbai, RBI Governor Shaktikanta Das said the decision was taken with a view to contain inflation. He said that geopolitical tension is pushing inflation, adding that the "global economic recovery is losing momentum". He said that the decision will take out Rs 87,000 crore liquidity from the system.
The decision to hike the rate was announced at a time when the inflation rates in the country have soared, breaching the central bank's estimate. Inflation in India has remained above the targetted 6 per cent since January. Das said the inflation print in April is also likely to be high. India's retail inflation jumped to a 17-month high of 6.9 per cent in March from 6.7 per cent in February.
"Shortages, volatility in commodities and financial markets are becoming more acute," he said.
This is the first time when the RBI has hiked the lending rate since August 2018.
"Market participants should expect at least 35 bp hike in June as well. In spite of the hikes, the monetary policy still remains accommodotary. RBI's decision is a welcome step from a financial stability perspective. CRR has been hiked as well which will reduce liquidity," Sandeep Bagla, CEO, Trust Mutual Fund, said.
"This rate hike is an attempt to control inflation which can become sticky and persist even after commodity prices moderate. It's a preventive measure and not a reactive one," Rajiv Shastri, Director and CEO, NJ AMC, said.
The decision follows an unscheduled meeting of the Monetary Policy Committee (MPC), with all six members unanimously voting for a rate hike while maintaining the accommodative stance.
