Mumbai May 4 : Reserve Bank of India (RBI) Governor Shaktikanta Das announced a 40-basis-point hike in the key lending rate and raised the cash reserve ratio by 50 basis points in an unscheduled announcement on May 4.
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. With this, the repo rate stands at 4.40 per cent. 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.
Today’s decision should be seen as part of the central bank’s announcement last month of gradual withdrawal from easy money regime, Das said. “The decision today to raise repo rate may be seen as reversal of rate action of May, 2020. In last month we had set out a stance of withdrawal of accommodation. Today’s action need to be seen in line with that action,” he said.