In what was a surprise move and not a part of the scheduled RBI meet, the Reserve Bank of India today hiked the repo rate by 40 basis points to 4.40%. The repo rate are rates at which the country's central bank lends money to commercial banks in the country. This is likely to increase interest rates for loans and deposits.
Today's surprise move comes ahead of the US Fed meeting, where a 50 basis points in the US Fed rates is likely. Globally, most of the central banks are tightening on fears of inflation, which may have prompted the country's central bank to hike rates as well.
In any case , the RBI's monetary policy committee (MPC) was slated to meet in June, where the belief was that the central bank would hike interest rates. However, coming just head of the US Fed meet, might suggest that the RBI did not want to stay behind the curve.
On Monday, the central board of the RBI approved the nomination 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.
In the last policy meeting, in April, the MPC shifted its focus to tackle inflation after the Russian invasion of Ukraine led to a surge in commodity prices including crude oil. The central bank also revised its inflation projection sharply and cut growth estimates.
"There is a collateral risk that inflation remains elevated," Shaktikanta Das said in his statement today. The MPC voted unanimously to increase the policy repo rate by 40 bps to 4.40% with immediate effect.
One of the reasons for the repo rate hike is that headline inflation has remained high as retail inflation in India rose to a 17-month high in March led by a sharper than expected spike in prices of food and manufactured goods, official data showed. It has now remained over the RBI's upper tolerance band of 6% for the third straight month.