RBI Monetary Policy: Central Bank Shocks With Unplanned Repo Rate, CRR Hikes

India's monetary policy committee raised rates by 40 basis points in an out-of-turn meet on Wednesday amid rising inflation concerns. The central bank raised the cash reserve ratio for banks by 50 basis points in an effort to pull out a large surplus of liquidity in the system.

Following the review:

• The repo rate was increased to 4.4% from 4%.

• The standing deposit facility will be offered at 4.15%, 25 basis points below the repo rate.

• The marginal standing facility will be offered at 4.65%; 25 basis points above the repo rate.

• The reverse repo rate stands unchanged at 3.35%.

The MPC decided to hold an off-cycle meeting to reassess the evolving inflation growth dynamics, RBI Governor Shaktikanta Das said. The inflation outlook needs a resolute and timely response to ensure that long-term inflation expectations are anchored, Das said. An MPC action at this juncture will help ensure macroeconomic stability, he added.

Alongside, the cash reserve ratio has been raised by 50 basis points to 4.5%, effective May 21, Governor Das said. The withdrawal of liquidity due to this increase would be to the order of Rs 87,000 crore.

The average surplus liquidity in the banking system was at over Rs 7 lakh crore in April, he said. This had led to the weighted average call rate dipping below the standing deposit facility rate, he added. Even with the CRR hike, the RBI will ensure adequate liquidity for productive needs of the economy.

Inflation and Growth Outlook

Heightened uncertainty surrounds the inflation trajectory, which is heavily contingent upon the evolving geopolitical situation, the MPC's resolution stated.

• Global commodity price dynamics are driving the path of food inflation in India, including prices of inflation-sensitive items that are impacted by global shortages due to output losses and export restrictions by key producing countries.

• International crude oil prices remain high but volatile, posing considerable upside risks to the inflation trajectory through both direct and indirect effects.

• Core inflation is likely to remain elevated in the coming months, reflecting high domestic pump prices and pressures from prices of essential medicines.

The worsening external environment, elevated commodity prices and persistent supply bottlenecks pose formidable headwinds, along with volatility spillovers from monetary policy normalisation in advanced economies, stated the MPC resolution. "On balance, the Indian economy appears capable of weathering the deterioration in geopolitical conditions but it is prudent to continuously monitor the balance of risks."

Taking into account the continuing pick-up in inflation, the central bank had revised its inflation projection to 5.7% in 2022-23 from an earlier projection of 4.5%. Inflation is projected at 6.3% in the April-June quarter, exceeding the RBI's upper target of 6%. GDP growth for 2022-23 is now projected at 7.2% from an earlier projection of 7.8%.

This is the first time that the MPC has hiked rates in two years, when it brought repo rate down to a record low of 4% in a bid to firefight the impact of the pandemic on the economy. It had last raised rates in August 2018.