RBI Guv Das announces hike in interest rate by 40 bps to 4.40% in 'off-cycle' MPC meet

The Reserve Bank of India (RBI) Governor Shaktikanta Das on Wednesday announced hike in benchmark interest rates by 40 basis points to 4.40 per cent with immediate effect.

The announcement comes after the central bank's Monetary Policy Committee (MPC), headed by Das, met on 2-4 May in an "off-cycle" meeting. 

This is the first-rate hike since August 2018 and the first instance of the MPC making an unscheduled increase in the repo rate. Repo rate is the rate at which banks borrow from the RBI, and is a key tool in the latter's arsenal to fight inflation. 

The MPC voted unanimously to increase the policy repo rate by 40 bps to 4.40 per cent with immediate effect. The standing deposit facility rate now stands at 4.15 per cent, while the marginal standing facility rate and bank rate stand at 4.65 per cent.

The MPC also hiked CRR (cash reserve ratio) by 50 basis points to 4.5 per cent from May 21. Under CRR, the commercial banks have to hold a certain minimum amount of deposit as reserves with the central bank. The percentage of cash required to be kept in reserves as against the bank's total deposits, is called the CRR.

India's 10-Year benchmark bond yield was up at 7.41 per cent after RBI raised its policy rate.

In his statement, Das added that persistent inflation (above 6 per cent) is becoming more acute. "There is a collateral risk that inflation remains elevated at this level for too long and can de-anchor expectations," he said.

The CPI-based inflation print for April is also expected to be elevated, Das said, adding that there was a spike in the headline CPI inflation in March, 2022 as anticipated.

Shortages, volatility in commodity and financial markets are becoming more acute. "We have deployed both conventional and unconventional tools to support growth," he added.

Das also said, "Confronted by elevated inflationary pressures that have shifted the future trajectory of inflation upwards, the MPC has announced the intention to engage in withdrawal of accommodation to ensure that inflation remains aligned to the target."

“The MPC judged that the inflation outlook warrants an appropriate and timely response through resolute and calibrated steps to ensure that second-round effects of supply-side shocks on the economy are contained and long-term inflation expectations are kept firmly anchored," Das said.

"In the MPC’s view, monetary policy response at this juncture would help to preserve macro-financial stability amidst increasing volatility in financial markets,” he added.

"The timing of the hike is important too as it seems to just precede a likely 50-75bps increase in the policy rate by the US Fed. This is possibly to ensure that the INR is safe from any speculative attacks, notwithstanding the LIC IPO, and especially as the FX reserves are down by around US30 bn from its peak levels. In this financial year alone, India’s FX reserves are down by about $6.9 billion," noted Indranil Pan - Chief Economist, YES Bank.

RBI MPC's rationale behind repo rate hike 

In his statement, Das noted that the MPC decided to hike repo rate on the backdrop of inflation is rising alarmingly and spreading fast globally. 

Geopolitical tensions are ratcheting up inflation to their highest levels in the last 3 to 4 decades in major economies while moderating external demand. Global crude oil prices are ruling above $100 per barrel and remain volatile. Global food prices touched a new record in March and have firmed up even further since then.

Das also said that inflation sensitive items relevant to India such as edible oils are facing shortages due to the conflict in Europe and export bans by key producers. The jump in fertiliser prices and other input costs has a direct impact on food prices in India. 

"Further, the normalisation of monetary policy in major advanced economies is now expected to gain pace significantly – both in terms of rate increases and unwinding of quantitative easing as well as rollout of quantitative tightening," he said. These developments would have ominous implications for emerging economies, including India. 

Meanwhile, COVID-19 infections and lockdowns in major global production hubs are likely to accentuate global supply chain bottlenecks while depressing growth. In fact, global growth projections have been revised downwards by up to 100 basis points for this calendar year. These dynamics pose upside risks to India’s inflation trajectory set out in the MPC resolution of April 2022, he highlighted.

"I am an internal optimist. My colleagues in the Reserve Bank and I strongly believe that our chosen path will guide is to a better tomorrow," Das concluded.

Sensex tanks over 1,000 points after RBI rate hike

Post RBI MPC repo rate hike, the equity benchmark indices crashed after the RBI's announcement. The 30-share BSE benchmark Sensex crashed over 1000 points to hit an intraday low of 55,915.35 and Nifty tanked over 300 points to 16,751.35.

Bajaj twins were the top losers on Sensex, followed by Titan, HUL, RIL and HDFC Bank.

Das held an unscheduled conference today, a day ahead of the Federal Reserve FOMC minutes, where it is expected to raise rates by 50 basis points.

In its April policy review, the central bank kept the benchmark interest rate unchanged at 4 per cent and going forward decided to withdraw its accommodative stance to ensure that inflation remains within the target level.

Retail inflation is hovering above the RBI's upper tolerance level for the past couple of months. It was 6.95 per cent in March and 6.07 per cent in February, mainly due to an uptick in food prices.

The central bank had last revised its policy repo rate or the short-term lending rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting the interest rate to a historic low.

ASLO READ: Sensex crashes over 1400 points as RBI hikes repo rate by 40 bps to 4.40%