The Monetary Policy Committee (MPC) on Wednesday collectively voted to increase the policy repo rate by 40 basis points from 4% to 4.40% with an immediate effect, in a clear indication that inflation may be curving to higher levels than expected. The move came a few hours ahead of the Federal Reserve’s rate decision on Wednesday, which is expected to see the U.S. central bank’s most aggressive action to contest inflation in decades.
As coincided shocks of increasing commodity prices and supply disruptions released by the Russia-Ukraine war moved the trajectory of inflation upwards, the six member rate setting committee decided to increase the repo rate after keeping it steady for two years since May 22, 2020. “As several storms hit together, our actions today are important steps to steady the ship,” explained RBI Governor Shaktikanta Das.
This offcycle rate hike, along with the hike in the Cash Reserve Ratio (CRR) by 50 basis points (bps) from 4% to 4.50%, is expected to gradually shoot up loan and deposit rates. The higher CRR, which was last increased from 3.50% to 4% on May 22, 2021, will pull ₹87,000 crore out of the system.
There is the collateral risk that if inflation remains increased at these levels for too long, it can deanchor inflation expectations which, in turn, can become self-satisfying and harmful to growth and financial stability. Hence, we must remain in readiness to use all policy levers to conserve macroeconomic and financial stability while enhancing the economy’s resilience,” Shaktikanta Das said.
Referring to the hike in the header CPI (consumer price index) based inflation in March (moved mainly by pricier food items) to 6.95% from 6.1% in February, Das said the print for April will also be high. Analysts say the repo rate hike may also be to stock capital outflows as well as depreciation of the rupee at a time when monetary policy authorities in major advanced economies have entered on rate increases and quantitative tightening.