The Reserve Bank of India (RBI) on May 4 announced an
increase in cash reserve ratio (CRR) by 50 basis points to 4.5%, effective May
21, in a bid to tighten the liquidity. The move is effective from the beginning
fortnight of May 21. The withdrawal of liquidity through hiked CRR could be
around Rs 87,000 crore.

The announcement was made by RBI Governor Shaktikanta Das
after an off-cycle meeting of the rate-setting panel – the Monetary Policy
Committee (MPC).

Also Read | Key announcements from RBI Governor Shaktikanta Das

Cash Reserve Ratio (CRR) is a percentage of a bank’s total deposits that are needed to maintain liquid cash. 

The RBI also hiked the repo rate by 40 basis points (bps)
to 4.44% in a surprise move that rippled through the equity and bond markets.
The move surprised markets pushing BSE Sensex down by over 1,400 points in the
intra-day trade and pushing the yield on India’s benchmark 10-year bond to
7.38%.

Also Read | RBI raises repo rate by 40 bps to 4.40% says Governor Shaktikanta Das

The sudden decision came ahead of an expected rate hike
from the US Federal Reserve and in the light of retail inflation breaching the
RBI’s upper limit for three consecutive months. The retail inflation for March
touched nearly 7% as food and commodity prices surged. Higher edible oil and
fertilizer prices can put further pressure on food prices.

An increase in CRR will remove the excess liquidity from
the market and is in line with RBI’s announcement of withdrawal of
accommodation. “The decision today to raise repo rate may be seen as a reversal
of rate action of May 2020. Last month, we set out a stance of withdrawal of
accommodation. Today’s action needs to be seen in line with that action,” Das
said.

This was the first such unscheduled statement from the
RBI governor since the start of the COVID-19 pandemic. The announcement
surprised the markets, pushing up bond yields and putting pressure on equity
indices.