BRINGING AN end to the low interest rate regime, the Reserve Bank of India (RBI) on Wednesday jacked up the Repo rate, the main policy rate, by 40 basis points to 4.40 per cent and the cash reserve ratio (CRR) by 50 basis points to 4.50 per cent to bring down the elevated inflation and tackle the impact of geopolitical tensions.
In an unscheduled meeting of the Monetary Policy Committee, the central bank, however, retained the accommodative monetary policy. The sudden RBI move — the first hike after August 2018 — is expected to push up interest rates in the banking system. Equated monthly installations (EMIs) on home, vehicle and other personal and corporate loans are likely to go up. Deposit rates, mainly fixed term rates, are also set to rise.
By hiking the Repo rate and CRR, the RBI is aiming to keep inflation – which is already close to 7 per cent – at its desired level and control and monitor money flow into the banking system.
The hike in Repo rate – the key policy rate of RBI or the rate at which it lends to banks – means the cost of funds of banks will go up. This will prompt banks and NBFCs to raise the lending and deposit rates in the coming days. Analysts say that consumption and demand can be impacted by the Repo rate hike.
From the 8 per cent level in January 2014, Repo rate had fallen to 4 per cent by May 2020 after the RBI slashed the rates over the years to boost growth – the last cut was by 40 basis points in May 2020 to tackle the negative impact of Covid-pandemic.
The 50 bps hike in CRR will suck out Rs 87,000 crore from the banking system. CRR is the percentage of depositors’ money that commercial banks have mandatory to park with the Reserve Bank. The lendable resources of banks will come down accordingly. It also means the cost of funds will go up and banks’ net interest margins could get adversely impacted. If the RBI wants to infuse more liquidity into a system, it lowers the CRR and leaves banks with more liquidity to lend to their customers. On the other hand, if it wants to take out liquidity from the system, it increases the CRR rate.
Unveiling the policy, RBI Governor Shaktikanta Das on Wednesday said the hike in Repo rate and cash reserve ratio was aimed at reining in elevated inflation amid the global turbulence in the wake of the Ukraine war.
“As several storms hit together, our actions today are important steps to steady the ship,” Das said in his statement. Inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth, he said. In the April 2022 policy review, the RBI had kept the Repo rate unchanged at four per cent but the situation, especially on the global and inflation fronts, has gone from bad to worse.
There was a spike in the headline CPI inflation to 6.95 per cent in March 2022 as anticipated in the April policy statement. The inflation print for April is also expected to be elevated. “There is the collateral risk that if inflation remains elevated at these levels for too long,” Das said, justifying the rate hike.
“I would, therefore, like to emphasize that our monetary policy actions today – aimed at lowering inflation and anchoring inflation expectations – will strengthen and consolidate the medium-term growth prospects of the economy,” he said.
“We remain mindful of the possible near-term impact of higher interest rates on output. Our actions will, therefore, be calibrated,” Das said. “I would like to further stress that monetary policy remains accommodative and our approach will be to focus on a careful and calibrated withdrawal of pandemic-related extraordinary accommodation, keeping in mind the inflation-growth dynamics.”
“It is necessary for monetary policy to focus on the withdrawal of accommodation,” Das said. The RBI had kept the Repo rate unchanged for the last two years and infused huge liquidity into the system to boost the growth.
“I take this as a strong message from the RBI that it’s taking inflation very seriously,” Kotak Mahindra Bank Vice Chairman and MD Uday Kotak said.
Analysts are now expecting more rate hikes by the RBI in the coming months. “The sharper than expected rate increase by the RBI today paves the way for a more aggressive rate hike cycle than we earlier expected,” said Abheek Barua, Chief Economist, HDFC Bank.
SBI and many banks recently hiked the MCLR (marginal cost of funds-based lending rate) points anticipating a rate hike.