Reserve Bank of India (RBI) announced a 40 basis point Repo Rate and 50 basis point CRR hike.
Reserve Bank of India (RBI) announced a 40 basis point Repo Rate and 50 basis point CRR hike.
Reserve Bank of India (RBI) Governor Shri Shaktikanta Das announced a 40 basis point hike in the benchmark lending rate and also raised the cash reserve requirement (CRR) by 50 basis points in a sudden announced statement on May 4 2022. The action stunned investors bringing Benchmark Index Sensex down by 1474 points in the intra-day trading. This also raising the rate on India’s benchmark 10-year bond to 7.38% which is surprising.
 |
| RBI Governor during Policy Meet |
One basis point means one tenth of a percentage point. The revised repo rate is currently stands at 4.40 percent and the CRR at 4.5 percent after the rate hike.
Today’s move should be considered as part of the central bank’s declaration last month of gradual departure from easy money regime to a controlled one, Das added. “The move today was to hike repo rate may be interpreted as reversal of rate action of May 2020 by reserve Bank. In previous month, we had put forth a posture of withdrawal of accommodation. Today’s activity ought to be seen in accordance with that action.”
Also Read :-Foreign Exchange and Factors Affecting Foreign Exchange Rates
The surprising action by RBI came ahead of an expected rate hike from the US Federal reserve and in the response to retail inflation continuously sticking beyond the comfort zone US Federal Reserve.
This is the first such unplanned rate hike announcement from the RBI governor since the start of the Covid-19 epidemic in 2020. The announcement stunned the equity markets, pushing up bond yields and putting heavy selling pressure on the equities indices.
Repo rate is the rate at which the Reserve bank lends short-term cash to banks. The RBI has already decreased the repo rate by 250 basis points since February 2019 to assist recover the growth momentum of economy. The Monetary Policy Committee has been on a protracted accommodating posture to boost economic growth of India.
In that sense, today’s news reinforces the evident reversal of the rate cycle and further rate hike in next policy meeting.
The monetary policy committee 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," RBI Governor Shaktikanta Das said.
“I would want to say that the monetary policy action is focused at controlling inflation rise and re-anchoring inflation related expectation,” Mr Das stated. “High inflation is recognised as adverse to growth of economy.”
The governor, however, underlined that monetary stance is accommodating and measures would stay calibrated to the growth and inflation.
Also Read :- Top 5 Indicator for Stock Market Trading.
Despite the continuing of accommodating stand, today’s rate move reflects the reversal of the loose money regime the Reserve bank had adopted throughout the onset of the Covid-19 epidemic. In its reaction to the Covid-19 pandemic, monetary policy had gears to an ultra-accommodative mode, with a major fall of 75 basis points Repo rate in the policy on March 27, 2020 followed by another cut of 40 basis points repo rate cut on May 22, 2020.
“I would like to emphasise that the monetary policy action is aimed at containing inflation spike and re-anchoring inflation expectation,” Mr Das added further.
However, in the April round of monetary policy, the Reserve bank had signalled to end the easy money stance with several liquidity management measures in alignment with the shift in the monetary policy stance from accommodative to semi controlled. Those measure also include restoration of a symmetric LAF corridor around the policy rate and the introduction of the standing deposit facility (SDF) (SDF).
Also Read:- What is an Initial Public Offering (IPO)
“These policies tools operationalise the emphasis attributed to preserving price stability,inflation, while keeping in mind the purpose of economic growth. Monetary policy has to generate an environment of inflation persistence is broken and inflation expectations are re-anchored,” Governor Das said .
