“Inflationary pressures have become broad-based and remain largely driven by adverse supply shocks. There are growing signs of a higher pass-through of input costs to selling prices,” governor Shaktikanta Das said after the announcement on Wednesday. “Further monetary policy measures are necessary to anchor the inflation expectations. The RBI is not bound by any stereotype and conventions.” The repo rate was raised by 50 basis points to 4.9%. All other rates such as the reverse repo rate, at which it pays banks for parking excess funds, moved higher by the same proportion.
CRR Unchanged
After skipping an inflation forecast at its off-cycle meeting last month, the RBI has raised it by 100 basis points (bps) to 6.7% for the full fiscal year, from 5.7% it had forecast in April. This is the second bump upward in as many months after a 120-bp increase in the first move.
An ET poll over the weekend had estimated the policy rate would be raised 25-50 bps. About half the 23 participants pegged it at 50 bps, while the others expected it to be between 25 and 40 bps.
Governor Das shocked investors last month with a 40 basis-point increase in rates at an unscheduled MPC meeting after maintaining status quo in the April review, putting inflation ahead of growth. With prices surging across the globe due to geopolitical tensions and supply disruptions, economists believe future increases could be sharper. “To knock high inflation out of the park, central banks are having to step out of the crease and come out swinging with tight monetary policy,” said Aurodeep Nandi, economist at Nomura Securities. “Today’s hike by 50 bps on the top of an inter-meeting 40 basis-point hike in May is reflective of inflation elbowing its way to the top of the RBI’s priority list and it belatedly looking to catch up with the curve.”
The RBI has enough in its arsenal to ensure smooth sailing of the government’s borrowing programme as it withdraws extraordinary liquidity pumped in to counter Covid-induced economic stress, Governor Das said.
The benchmark bond yield, which declined as much as 8 bps intraday, ended 3 bps lower at 7.49% as there were no liquidity tightening measures. Governor Das said the central bank will remain focused on an “orderly completion” of the borrowing programme. The Sensex declined 0.4% to 54,885.48 points. The rupee was a tad lower, closing at 77.73 to the dollar.
The RBI promised enough liquidity to ensure sufficient credit for companies. The cash reserve ratio (CRR) was kept unchanged, although there had been expectations it could be raised again from 4.5%. Indian lenders had asked the central bank not to further increase CRR, ET reported on Tuesday.
