RBI surprises with 40 bps rate increase amid inflation ‘alarm’

The Reserve Bank of India (RBI) in a sudden move on Wednesday raised the policy repo rate by 40 basis points (bps) to 4.4% and the Cash Reserve Ratio (CRR) by 50 basis points to 4.5%.

Making an unscheduled announcement, RBI Governor Shaktikanta Das said the Monetary Policy Committee (MPC) of the RBI met in an off-cycle meet and decided to increase the policy rates to curb the rising inflation. 

Despite the rate increase, the RBI would maintain its ‘accommodative’ stance, even as the fundamentals of the Indian economy remained strong, he stated.

‘With immediate effect’

The RBI said the increase in the policy repo rate would take effect immediately.

Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15% and the marginal standing facility (MSF) rate and the Bank Rate to 4.65%.

“The MPC also decided to remain accommodative while focussing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” the RBI said in a statement.

“These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%,” it noted.

Disruptions, shortages

The RBI said since the MPC’s meeting in April 2022, disruptions, shortages and escalating prices induced by geopolitical tensions and sanctions have persisted and downside risks have risen.

“Heightened uncertainty surrounds the inflation trajectory, which is heavily contingent upon the evolving geopolitical situation. Global commodity price dynamics are driving the path of food inflation in India, including prices of inflation-sensitive items that are impacted by global shortages due to output losses and export restrictions by key producing countries,” the central bank pointed out.

The RBI said the MPC was of the view that while economic activity was navigating the vortex of forces confronting the world with resilience on the strength of underlying fundamentals and buffers, the risks to the near-term inflation outlook were rapidly materialising, as reflected in the inflation print for March and the developments thereafter.

“In this milieu, the MPC expects inflation to rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second-round effects,” it said.

However, the RBI Governor sought to allay fears of the impact of higher interest rates on growth, saying: “Our monetary policy actions today – aimed at lowering inflation and anchoring inflation expectations – will strengthen and consolidate the medium-term growth prospects of the economy”. He pointed out that sustained high inflation ‘inevitably hurts savings, investment, competitiveness and output growth’

He stressed that the RBI was mindful of the possible near-term impact of higher interest rates on output, and assured that its approach would be to focus on ‘a careful and calibrated withdrawal of pandemic-related extraordinary accommodation, keeping in mind the inflation-growth dynamics’. The RBI would ensure ‘adequate liquidity in the system to meet the productive requirements of the economy in support of credit offtake and growth’, he added.