RBI shocks markets with 40 basis point rate hike, deepening the battle with inflation

The Reserve Bank raised the benchmark lending rate by 40 basis points (bps) to 4.40 percent on Wednesday in an effort to keep inflation under control, which has been above the 6% target zone for the past three months. The decision came after an unplanned meeting of the Monetary Policy Committee (MPC), in which all six members voted unanimously for a rate hike while keeping the accommodative stance.

To suck out Rs 87,000 crore of liquidity from the banking system, the Monetary Policy Committee (MPC) led by RBI Governor Shaktikanta Das increased the percentage of deposits banks are required to retain a cash reserve by 50 basis points to 4.5 percent.

The CRR increase will take effect on May 21.

This is the first rate hike since August 2018 and the first time the MPC has raised the repo rate without warning (the rate at which banks borrow from the RBI).

The MPC agreed unanimously to raise interest rates while remaining accommodating.

While inflation has remained above the target of 6% since January, Das predicts that the April figure will be high as well.

The retail inflation rate in March came in at 6.9%.

The MPC decision, according to the governor, reversed the May 2020 interest rate drop by an equal amount.

On May 22, 2020, the central bank altered its policy repo rate, or short-term lending rate, in an off-policy cycle to boost demand by decreasing the interest rate to a historic low of 4%.

The statement comes only days after the Reserve Bank of India’s Central Board of Directors had its 595th meeting.

The RBI’s central board approved Rajiv Ranjan’s nomination as a member of the MPC on Monday. Mridul Saggar, who retired on April 30, was replaced by Ranjan.

Ranjan is the MPC’s third (ex-officio) internal member. The next meeting of the Monetary Policy Committee is set for June 6-8.

The MPC opted to maintain an accommodative policy “while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth” at its most recent meeting.