RBI hikes repo rate by 40bps to 4.40%, CRR by 50bps, cites inflation worries

The decision taken today to raise the repo rate may be seen as a reversal of rate action of May 2020

May 4, 2022

Sensex crashes 1,307 points after RBI’s rate hike surprise

Reserve Bank of India (RBI) Governor Shaktikanta Das on Wednesday said that the Monetary Policy Committee (MPC) of the central bank, in an off-cycle meeting, hiked the repo rate by 40 basis points (bps) to 4.40 percent with immediate effect. Also, the case reserve ratio has been hiked by 50 basis points to 4.5 percent. The move was taken in order to contain inflation.

Most importantly, the unscheduled announcement by the central bank surprised the equity markets as it nose-dived right after. Sensex tanked nearly 1,100 points, whereas Nifty over 300 points.

Indian equity benchmarks on Wednesday plunged sharply and settled in the red after the RBI announced a hike in repo rate.

Following the RBI announcement, the Sensex declined 1,307 points, or 2.29 percent, and settled at 55,669 points, whereas the Nifty fell 392 points, or 2.29 percent, to 16,678 points. All the sectoral indices too declined in the intra-day trade.

The Repo rate 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 the growth.

The Russia-Ukraine war has led to a steep rise in commodities prices which further results in soared retail inflation worldwide. The ongoing geopolitical tensions are pushing inflation higher in major economies besides the crude oil price also being volatile and above $100 per barrel. Edible oil shortage is due to the conflict and ban by exporters, said Das.

“The decision today to raise the 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,” Das said.

“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.” Das, however, added that the monetary stance remains accommodative and actions will remain calibrated.

Meanwhile, The US Federal Reserve is also expected to raise rates at its ongoing policy meet to fight the prevailing higher inflation.

Ravi Singh, Vice President and Head of Research at ShareIndia, opined, “Several central banks have already started policy tightening to curb the inflation. Today the rate hike move of 40 bps by RBI has been aimed at containing inflation spikes & re-anchoring inflation expectations. However, RBI has ensured that there will be adequate liquidity in the system to meet the production requirements of the economy.”

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities said, “While inflation is unlikely to decline in the near term, the policy rate hike move would help in pushing real rates towards neutral over the next few quarters.”

[With Inputs from IANS]

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