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RBI Governor Shaktikanta Das announces 40 bps repo rate and 50 bps CRR hike as inflation weighs

economy | May 4, 2022 12:07 PM IST

RBI Governor Shaktikanta Das announces 40 bps repo rate and 50 bps CRR hike as inflation weighs


RBI Governor in an out of turn press conference has announced that the Monetary Policy Committee has decided to hike lending rates by 40 bps to 4.40% as inflation and changing global economics due to hikes by other central banks led by US Fed weigh.

The Reserve Bank of India Governor Shaktikanta Das has announced that the Monetary Policy Committee has decided to hike lending rates by 40 bps to 4.40 percent.

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The MPC has also decided to remain accommodative while focusing on withdrawal and thus a reversal of the rate action in 2020 which saw 75 bps shaved off after the global economy went into turmoil due to the COVID-19 pandemic.
Therefore, in line with this, the MPC has decided to increase the Cash Reserve Ratio (CRR) by 50 bps to 4.5 percent effective May 21. According to CNBC-TV18 research, this hike will mean a withdrawal of around Rs 85,000 crore liquidity from the system.
The RBI Governor said that the high-frequency indicators for April indicate persistent high food inflation and "this pressure is likely to continue".
"Liquidity conditions need to be modulated in line with policy stance, actions said Das adding, "MPC decided to hold an off-cycle meeting to reassess the inflation-growth dynamics. There is a collateral risk of inflated inflation for a long time."
Subsequently, the standing deposit facility (SDF) stands adjusted to 4.15 percent and marginal standing facility (MSF) to 4.65 percent.
The RBI had kept its key lending rate at a record low, keeping the repo rate unchanged at 4 percent in the April monetary policy.
10-year bond yield rises to 7.4% on RBI's rate hike
The Indian bond market has been under pressure following the announcement. The 10-year bond yield (6.54%, 2032) that the market tracks, rose above 7.4 percent from the previous day’s close of 7.12 percent.
The markets were in the red ahead of the RBI presser and slumped sharply after the announcement. The Nifty 50 ended at 16,677,  down 2.3 percent while the Sensex tanked 1,300 points to end at 55,669.
Market laggards on May 4 after the surprise RBI policy announcement
“I am not concerned about the short-term reaction of the market but over a few months or medium-term, I do not think this is a show spoiler. This was on expected lines and large foreign institutional investors (FIIs) will be relieved that the central bank is not pushed into growth theme given that elections are not too far by the government that does not raise the hike when there are so many imperatives because of inflation,” said Nirmal Jain, Founder & Chairman, IIFL Group.
Reacting to the CRR hike, Soumya Kanti Ghosh, Group Chief Economic Advisor at State Bank of India said, "CRR move is a smart policy because this could open up space for liquidity operations and this can give back to the system in some other form. So this should give the RBI opportunity to address the duration, supply in the market while absorbing some part of the liquidity."
Meanwhile, later tonight, the US Fed is expected to hike by 50 and then probably the Fed Chair is expected to signal another 50 bps in the next meeting.
Economists believe that the RBI rate hike ahead of the US Fed one is aimed at managing the outflow of foreign investor funds which otherwise would have been higher.
Market watchers across the world have their eye on the US Federal Reserve which is going to announce its rate decision later tonight. Almost all Federal Open Market Committee (FOMC) policymakers who have spoken since the last meeting in March have indicated varying degrees of comfort with a 50 basis points (bps) hike.
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