Reserve Bank of India (RBI) Governor Shaktikanta Das announced a 40 basis point hike in the policy rate and raised the cash reserve ratio by 50 basis points in an unscheduled announcement on May 4.

A basis point is one-hundredth of a percentage point. The revised repo rate is now 4.40% and the CRR is 4.5%.

     

Today's decision should be seen as part of the central bank's announcement last month of its phasing out of the easy money scheme, Das said. "Today's decision to increase the repo rate can be viewed as a reversal of the May 2020 rate action. Last month, we established a position on withdrawing the adjustments. Today's action should be viewed as consistent with this action.

The surprise move comes ahead of an expected rate hike by the US Federal Reserve and amid retail price inflation that remains consistently above the central bank's comfort zone.

It is the first unannounced statement by the RBI governor since the start of the pandemic in 2020. The announcement caught markets by surprise, propelling bond yields higher and putting pressure on stock indices.

Repo is the interest rate at which the central bank lends short-term funds to banks. The RBI has cut the repo rate by 250 basis points since February 2019 in a bid to revive growth momentum. The Monetary Policy Committee maintained a long-term dovish stance to support growth.

In this sense, today's announcement confirms the strong reversal of the interest rate cycle.

"I would like to emphasize that the monetary policy measures are aimed at containing the rise in inflation and re-anchoring inflation expectations," Das said. "It is well known that high inflation is detrimental to growth."

However, the governor added that monetary policy would remain accommodative and measures would remain calibrated.

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