RBI hikes repo rate by 40 bps on inflation worries

Reserve Bank of India Governor Shaktikanta Das on Wednesday said that the Monetary Policy Committee (MPC) of the central bank, in an off-cycle meeting, hiked the repo rate by 40 basis points (bps) to 4.40 per cent with immediate effect.

Repo rate is the rate at which the central bank lends short-term funds to banks. The RBI has cut the repo rate by 250 basis points since February 2019 to help revive the growth momentum. The Monetary Policy Committee has been on a prolonged accommodative stance to support the growth.

Also, the case reserve ratio has been hiked by 50 basis points to 4.5 per cent. The move was taken in order to contain inflation.

The ongoing geopolitical tensions are pushing inflation higher in major economies besides the crude oil price also being volatile and above $100 per barrel.

Edible oil shortage is due to the conflict and ban by exporters, said Das. “The decision today to raise the repo rate may be seen as a reversal of rate action of May 2020. Last month, we had set out a stance of withdrawal of accommodation. Today’s action needs to be seen in line with that action,” Das said.

“I would like to emphasise that the monetary policy action is aimed at containing inflation spike and re-anchoring inflation expectation,” Das said. “High inflation is known as detrimental to growth.”

Das, however, added that monetary stance remains accommodative and actions will remain calibrated.

Most importantly, the unscheduled announcement by the central bank surprised the equity markets as it nose-dived right after.

Sensex tanked nearly 1,100 points, whereas Nifty over 300 points.

quities tank after RBI’s policy rate hike, settle sharply low. Indian equity benchmarks on Wednesday plunged sharply and settled in the red after the Reserve Bank of India (RBI) announced a hike in repo rate.

In a surprise and unscheduled move, the central bank raised the repo rate by 40 basis points (bps) to 4.40 per cent.

The US Federal Reserve is also expected to raise rates at its ongoing policy meet to fight the prevailing higher inflation.

Following the RBI announcement, the Sensex declined 1,307 points, or 2.29 per cent, and settled at 55,669 points, whereas Nifty fell 392 points, or 2.29 per cent, to 16,678 points.

All the sectoral indices too declined in the intra-day trade. “Several central banks has already started policy tightening to curb the inflation. Today the rate hike move of 40 bps by RBI has been aimed at containing inflation spikes & re-anchoring inflation expectations. However, RBI has ensured that there will be adequate liquidity in the system to meet the productive requirements of the economy,” said Ravi Singh, Vice President and Head of Research at ShareIndia.

The ongoing geopolitical tensions are pushing inflation higher in major economies besides the crude oil price also being volatile and above $100 per barrel.

The Russia-Ukraine war has led to steep rise in commodities prices which further results in soared retail inflation worldwide.

While inflation is unlikely to decline in the near term, the policy rate hike move would help in pushing real rates towards neutral over the next few quarters, said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.

“Rates across the curve will reprice factoring in a markedly more hawkish RBI. We continue to expect cumulative 100-125 bps of repo rate hikes

Rate hike good for banking sector as risk getting re-priced: SBI report: The decision to hike policy rate will be ultimately good for the banking sector as the risk is getting re-priced properly, SBI’s Economic Research Department said in a report.

“The situation is different than during the global financial crisis wherein the lending started increasing aggressively much before the rate hike cycle began (March 2010 till October 2011),” said Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India.

Currently, the rate hike cycle has begun and now bank lending will increase factoring in the risk.

In an off-cycle meeting, the Reserve Bank of India on Wednesday hiked the repo rate by 40 basis points (bps) to 4.40 per cent with immediate effect. It also hiked the cash reserve ratio (CRR) by 50 basis points to 4.5 per cent.

On CRR, the report said: “High government borrowing has ruled out the possibility of OMO sale, thus CRR increase seemed as the possible non-disruptive option of absorbing the durable liquidity.”

Agencies