Reserve Bank of India’s monetary policy committee has voted to raise repo rate by 40 basis points to 4.40% with immediate effect due to inflationary pressures, Governor Shaktikanta Das announced on Wednesday.
Repo rate is the interest rate at which the central bank lends to commercial banks. This is the first rate hike since August 2018, PTI reported. The move will raise borrowing costs for corporates and individuals.
India’s retail inflation accelerated to a 17-month high of 6.95% in March, above the 6% upper limit of the Reserve Bank of India’s targeted range for a third straight month. This is likely to rise further due to a jump in oil prices since Russia’s invasion of Ukraine has led to higher consumer prices.
Food prices, which contribute to nearly half of the consumer price index, increased to 7.68% year-on-year in March from 5.85% a month ago.
At a press conference in Mumbai on Wednesday, Das warned that food inflationary pressures are likely to continue in April too.
The governor said all six members of the monetary policy committee unanimously voted for the repo rate hike while maintaining the accommodative stance. The decision was taken by the central bank at an off-cycle meeting held between May 2 and May 4.
“The risks of unprecedented input cost pressure translating into another round of price increases are now more potent than before,” Das added. “Shortages and volatility in commodities and financial markets are becoming more acute.”
Das also announced a hike in cash reserve ratio by 50 basis points to 4.50%. Cash reserve ratio is a percentage of a bank’s total deposits that it needs to maintain as liquid cash in the Reserve Bank of India.
The cash reserve ratio hike come into effect from May 21 and put further pressure on interest rates, The Economic Times reported.
Following the governor’s announcement, the Sensex tumbled 1,060.64 points or 1.86% to 55,915.35 in late afternoon trade. The Nifty also crashed 317.75 points or 1.86% to 16,751.35.
On April 8, the central bank’s monetary policy committee held the the repo rate unchanged at 4% for the eleventh consecutive time. However, it increased the reverse repo rate by 40 basis points to 3.75% from previous years’ 3.35%. The reverse repo rate allows banks to deposit funds with the central bank and earn interest on them.
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