In a surprise move, the Reserve Bank of India (RBI) Governor Shaktikanta Das on Wednesday announced that the MPC voted unanimously to increase the policy repo rate by 40 basis points (bps) to 4.40% with immediate effect, citing persistent inflationary pressures in the economy. This is RBI’s first increase in borrowing rates since August 2018.
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Today’s decision should be seen as part of the central bank’s announcement last month of gradual withdrawal from the easy money regime, Das said. “The decision today to raise repo rate may be seen as a reversal of rate action of May 2020. Last month, we set out a stance of withdrawal of accommodation. Today’s action needs to be seen in line with that action.”
The surprise move came ahead of an expected rate hike from the US Federal Reserve and in the backdrop of retail inflation persistently staying above the central bank’s comfort zone.
This is the first such unscheduled statement from the RBI governor since the start of the pandemic in 2020. The announcement surprised the markets, pushing up bond yields and putting pressure on the equity indices.
Repo 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 growth.
In that sense, today’s announcement confirms the clear reversal of the rate cycle.
“I would like to emphasize 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.”
