RBI Increases the Key Rates

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In a mid-cycle move the Monetary Policy Committee (MPC) unanimously voted to raise the policy Repo rate by 40 basis points from 4 per cent to 4.40 per cent with immediate effect.  This clearly indicates that inflation might be moving to a higher level than expected.  The US Fed announced a rate hike which has also put RBI on the curve after criticism for being behind.

The cause of inflation is attributed to the rising commodity prices, and supply disruptions due to Russia-Ukraine War. The RBI Governor said that several storms hitting together at one point, forced them to raise the rates.  MPC also would remain accommodative while focusing on withdrawal of accommodation in order to ensure that inflation remains within the target (4% with a +/- 2% tolerance band), going forward while supporting growth.

The rate hike in CRR by 50 basis points from 4 to 4.5% would gradually push up the lending rates. It was on May 22, 2021 that the CRR was raised from 3.50% to 4%.  The raise in CRR is expected to suck Rs. 87,000 crore out of the system.

What analysts Say?

1. The rate hike also would be to stem capital outflows as well as depreciation of rupee at a time when the other Economic countries have resorted to rate increase and quantitative tightening measures.
2. The Consumer price index based inflation for March was 6.95% which was earlier 6.1% in February which would still higher for April 22 as per reports.
3. The RBI Governor further added that a continuous increase in inflation is detrimental for economic growth and financial stability and hence all policy levers should be used to preserve macroeconomic and financial stability.
4. The CRISIL executives opined that gradual normalization policy of RBI has come to an end and an increased measures on policy matters and monetary control by others, have forced RBI to increase the rates. Also, they added that they expect RBI to increase the REPO rate by another 75-100 Basis Points this year.
5. The MD and CEO of Union Bank of India said that the rate hike was expected, however the timing was bit surprising. Hence all loans will be re-priced now and the deposit cost for a bank goes up with the liquidity in the system going down. Now the liquidity is going out of the system banks will start increasing the deposit rates.