The Reserve Bank of India after an off-cycle meeting of the Monetary Policy Committee decided on Wednesday to increase the repo rate by 40 basis points with immediate effect, with an aim to tame inflation.
At the meetings held on May 2 and 4 the members voted unanimously in favor of a rate hike. At a press briefing on Wednesday, central bank governor Shaktikanta Das said the committee had decided to “remain accommodative while focusing on withdrawal of accommodation” to ensure that inflation remains within the target.
The Central Bank had after its last meeting held on April 6-8 kept the rates unchanged but conceded that inflation needs to be brought under control. It had raised the retail inflation projection for the current fiscal year to 5.7%, from an earlier forecast of 4.5%.
Monetary Policy Committee meetings are usually held once in two months, and this out-of-turn meeting has raised many eyebrows. Many opine that the Reserve Bank must have felt that waiting till the next scheduled meeting, June 6-8, to alter the rates will be too late in fighting the runaway inflation. Interestingly, this comes hours before the US Federal Reserve is expected to announce an increase in rates.
The repo rate has not risen since August 1, 2018, and with this surprise move, it stands at 4.40%. Consequently, the standing deposit facility rate stands adjusted to 4.15%; the marginal standing facility rate and the bank rate, to 4.65%.
The central bank has now also increased the cash reserve ratio of banks by 50 basis points to 4.5% of net demand and time liabilities. This is the percentage of cash deposits commercial banks have to hold as reserves with the central bank. This new norm will be effective from May 21 and will remove 870 billion rupees of liquidity from the system.
India’s retail inflation in March had surged to a 17-month high of 6.95% on the back of costlier food items, according to government data. This is much higher than the Reserve Bank of India’s tolerance limit of 4% with a margin of 2% on either side. It was also the third consecutive month of Consumer Price Index-based inflation crossing the 6% mark.
Wholesale price inflation touched a four-month high in March on the back of high fuel and commodity prices. The wholesale price index inflation rose to 14.55% in March, from 13.11% in February, and has remained in double-digit territory for the last 12 months.
It may also be noted that fuel prices were hiked on a sustained basis from the second fortnight of March. Its impact on the overall inflation is expected to have intensified in April. The war in Ukraine has exacerbated the situation further.
A week ago, former Reserve Bank governor Raghuram Rajan had said India’s inflation is going up and the central bank at some point will have to increase interest rates. He had pointed out that the rest of the world is already doing it. In a post on the social media platform LinkedIn he had said such a hike was an “an investment in economic stability, whose greatest beneficiary is the Indian citizen.”
The Reserve Bank of India has kept interest rates unchanged at a low rate for over two years to promote economic recovery from the Covid-19 pandemic. Its stance was to focus on growth, with any inflation considered transitory.
The current uptick in inflation comes at a time when the Indian economy has been showing signs of recovery after a decline in the number of Covid-19 cases and the easing of lockdown curbs. Experts fear a long spell of inflation will dampen growth.