RBI raises interest rates for first time since 2018

Reserve Bank of India (RBI) Governor Shaktikanta Das announced a 40-basis-point hike in the key lending rate and raised the cash reserve ratio (CRR) by 50 basis points in an unscheduled announcement on May 4. The move surprised markets pushing Benchmark Sensex down by 1474 points in the intra-day trade and pushing the yield on India’s benchmark 10-year bond to 7.38 per cent.

One basis point is one hundredth of a percentage point. The revised repo rate now stands at 4.40 percent and the CRR at 4.5 percent.

Today’s decision should be seen as part of the central bank’s announcement last month of gradual withdrawal from easy money regime, Das said. “The decision today to raise repo rate may be seen as reversal of rate action of May 2020. In last month, we had set out a stance of withdrawal of accommodation. Today’s action need to be seen in line with that action.”

The surprise move  came ahead of an expected rate hike from the US Federal reserve and in the backdrop of retail inflation persistently staying above the central bank’s comfort zone.

This is the first such unscheduled statement from the RBI governor since the start of the pandemic in 2020. The announcement surprised the markets, pushing up bond yields and putting pressure on the equity indices.