India’s central bank hikes a key rate in a surprise move

A rate surprise.
A rate surprise.
Image: REUTERS/Francis Mascarenhas
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The Reserve Bank of India (RBI) today raised the repo rate by 40 basis points to 4.40%. The repo rate is the one at which the central bank lends money to the country’s commercial banks.

This abrupt move is now likely to increase the cost of borrowing.

The announcement today by RBI governor Shaktikanta Das came much earlier than the next monetary policy, which was due only on June 4. It follows a long period of stable interest rates it had maintained over the past many months despite rising inflation beginning to worry many stakeholders in the country’s economy.

Consumer price-based inflation (CPI) had jumped to the highest level in 17 months in March in the wake of the Ukraine war disrupting global supply chains and fuelling a spike in commodity prices.

Das today said that March’s sharp jump in CPI was propelled in particular by food inflation. He also suggested, going by all indicators, that food prices will remain high in the foreseeable future.

“The biggest contribution to overall macroeconomic and financial stability, as well as sustainable growth, will come from our effort to maintain price stability,” Das said today.

He also said that “a worsening of the terms of trade could have negative implications for the current account deficit,” although he also assured that it will be “comfortably financed.”

“The logical underpinning of RBI hike today and away from the regular policy date is the rising concern on inflation—especially with regards to food,” Indranil Pan, chief economist of Yes Bank said.

Pan also said that the timing of the policy move is crucial too as it precedes a possible 50-75 basis point increase in the interest rates by the US Federal Reserve.

In addition to the repo rate, the RBI raised the cash reserve ratio—the percentage of money that commercial banks have to mandatorily park with the central bank—by 50 basis points to 4.50%, effective from May 21. This implies that banks’ lendable resources will come down accordingly.