The Monetary Policy Committee (MPC), led by RBI Governor Shaktikanta Das, has also increased the amount of deposits banks need to hold a cash reserve from 50 basis points to 4, 5% of Rs 87,000 crore Drain liquidity from the banking system.
- CRR hike will be effective from May 21.
- This is the first-rate hike since August 2018.
- Also the first instance of MPC making an unscheduled repo rate increase
In a move that will increase the cost of borrowing for businesses and individuals, the RBI raised interest rates by 40 basis points (bps) to 4.40% on Wednesday after an unscheduled meeting of the MPC in a bid to stem inflation which has been stubbornly above target. 6 percent has remained over the past three months.
The Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, has also increased the level of deposits banks need to hold a cash reserve by 50 basis points to 4.5%, removing Rs 87,000 crore of liquidity to the banking system.
The increase in the CRR applies from 21 May.
This is the first rate hike since August 2018 and the first time the MPC has made unanticipated hikes in the repo rate (the rate at which banks borrow from the RBI).
The MPC voted unanimously to raise rates but maintained a dovish stance.
While inflation has remained above the 6% target since January, Das said inflationary pressures are also expected to be high in April.
Retail inflation for March was 6.9%. The governor said the MPC’s decision reversed the May 2020 rate cut by an equal amount.
The central bank last revised its policy rate, or short-term lending rate, on May 22, 2020 in an off-policy cycle to stimulate demand by cutting the interest rate to an all-time low of 4%.
The announcement comes days after the 595th meeting of the central board of the Reserve Bank of India.
On Monday, the RBI board approved the appointment of Rajiv Ranjan as a member of the MPC.
Ranjan replaced Mridul Saggar who retired on April 30. Ranjan is the third internal member (ex officio) of the MPC. The next monetary policy meeting is scheduled for June 6-8.
The latest MPC meeting decided to maintain an accommodative stance “while focusing on unwinding the accommodation to ensure future inflation remains within target while supporting growth.”
