RBI Governor Shaktikanta Das in a surprise statement on May 4, announced that the MPC has decided to raise the repo rate by 40 basis points with immediate effect in a bid to curb inflation, which has remained above the upper band of 6% for the last three months.

The Governor said that there was a spike in March retail CPI, and April CPI is expected to elevate. “If this scenario unfolds it can deanchor expectations and impact growth,” he said, adding that the situation is dynamic and fast changes and actions have to be tailored.

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The Monetary Policy Committee (MPC) held an off-cycle meeting from May 2 to May 4 and voted to increase repo rates by 40 basis points. 

The MPC has decided to remain accommodative while focusing on withdrawal and thus a reversal of the rate action which saw 75 bps take off after the global economy went into turmoil after the COVID-19 pandemic struck.

Therefore, the MPC has raised the Cash Reserve Ratio (CRR) by 50 bps to 4.5%.

“Liquidity conditions need to be modulated in line with policy stance, actions. 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 said” Das.

Eventually, the standing deposit facility (SDF) stands adjusted to 4.15% and the marginal standing facility (MSF) to 4.65%.

India’s 10-year benchmark bond yield was up at 7.41% after RBI raised its policy rate.

“Shortages, volatility in commodity and financial markets are becoming more acute. We have deployed both conventional and unconventional tools to support growth,” said Das.

He added that MPC will retain its accommodative monetary policy stance at a time when global inflation is rising alarmingly even as investment activity is showing some traction in the country.

“The MPC judged that the inflation outlook warrants an appropriate and timely response through resolute and calibrated steps to ensure that second-round effects of supply-side shocks on the economy are contained and long-term inflation expectations are kept firmly anchored,” said Das.

According to MPC, monetary policy response at this juncture would help to preserve macro-financial stability amidst increasing volatility in financial markets. The governor pointed out that the rate hike is seen as a reversal of the rate action of May 2020. This move aligns with the stance of withdrawal of accommodation.

“I am an internal optimist. My colleagues in the Reserve Bank and I strongly believe that our chosen path will guide us to a better tomorrow,” Das concluded.