Mumbai, May 4 (FN Agency) After a gap of almost four years, the Reserve Bank of India (RBI) on Wednesday increased the benchmark lending rate by 40 basis points to 4.40 per cent with immediate effect. Announcing the decision of the Monetary Policy Committee to increase the repo rate, RBI Governor Shaktikanta Das highlighted that amid the current global scenario, it is necessary to remain in readiness to use all policy levers to preserve macroeconomic and financial stability while enhancing the economy’s resilience. “Against this backdrop, the Monetary Policy Committee (MPC) decided to hold an off-cycle meeting on 2nd and 4th May, 2022 to reassess the evolving inflation-growth dynamics and the impact of the developments after the MPC meeting of April 6-8, 2022. Based on this assessment of the macroeconomic situation and the outlook, the MPC voted unanimously to increase the policy repo rate by 40 basis points to 4.40 per cent, with immediate effect,” Das said. This is the first time after almost four years that the RBI has increased the base rates. The last hike was announced on August 3, 2018 when the rates were increased from 6.25 per cent to 6.50 per cent, after which the RBI had started reducing the rates.
Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15 per cent; and the marginal standing facility (MSF) rate and the bank rate to 4.65 per cent. “The MPC also decided unanimously to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” the Governor added. Explaining the rationale behind this hike much before the next bi-monthly meeting slated in June 2022, Das said, “the MPC judged that the inflation outlook warrants an appropriate and timely response through resolute and calibrated steps to ensure that the second-round effects of supply side shocks on the economy are contained and long-term inflation expectations are kept firmly anchored. In the MPC’s view, monetary policy response at this juncture would help to preserve macro-financial stability amidst increasing volatility in financial markets.” Das noted that there is the collateral risk that if inflation remains elevated at these levels for too long, it can de-anchor inflation expectations which, in turn, can become self-fulfilling and detrimental to growth and financial stability.
“Hence, we must remain in readiness to use all policy levers to preserve macroeconomic and financial stability while enhancing the economy’s resilience. I reiterate that the situation is dynamic and fast changing and our actions have to be tailored accordingly,” the Governor said. The RBI has also increased the cash reserve ratio by 50 basis points to 4.5 per cent, which will come into effect from May 21, 2022. The RBI has also decided to shift its focus to withdrawal of the accommodative stance which it has adopted during the Covid 19 pandemic. “…it is necessary for monetary policy to focus on the withdrawal of accommodation. Monetary policy had shifted gears to an ultra-accommodative mode, with a large reduction of 75 basis points in the policy repo rate on March 27, 2020 followed by another reduction of 40 basis points on May 22, 2020. Accordingly, the decision of the MPC today to raise the policy repo rate by 40 bps to 4.40 per cent may be seen as a reversal of the rate action of May 22, 2020 in keeping with the announced stance of withdrawal of accommodation set out in April 2022,” Das added.