Mumbai: The Reserve Bank of India’s Monetary Policy Committee in an unscheduled meeting on Wednesday unanimously decided to increase the policy repo rate by 40 basis points to 4.40 percent with immediate effect citing inflation worries.
This is the first increase in the policy repo rate since May 2020 marking a reversal of the RBI’s monetary policy stance.
The RBI Governor Shaktikanta Das said that the Monetary Policy Committee (MPC) decided to hold an off-cycle meeting on 2nd and 4th May 2022 to reassess the evolving inflation-growth dynamics and the impact of the developments after the MPC meeting of April 6-8, 2022.
He further added that “Based on this assessment of the macroeconomic situation and the outlook, the MPC voted unanimously to increase the policy repo rate by 40 basis points to 4.40 percent, with immediate effect,”.
The governor also said that the MPC also decided unanimously to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.
The RBI Governor pointed out that “the decision of the MPC today to raise the policy repo rate by 40 bps to 4.40 percent may be seen as a reversal of the rate action of May 22, 2020, in keeping with the announced stance of withdrawal of accommodation set out in April 2022,”
Since the MPC’s meeting in April 2022, disruptions, shortages and escalating prices induced by the geopolitical tensions and sanctions have persisted and downside risks have increased. The International Monetary Fund (IMF) has revised its forecast of global output growth for 2022 by 0.8 percentage points to 3.6 percent, in a span of fewer than three months. The World Trade Organization (WTO) has scaled down the projection of world trade growth for 2022 by 1.7 percentage points to 3.0 percent.
The RBI’s action on rate hikes is aimed to curb inflationary pressure.
The Monetary Policy Statement noted that in March 2022, headline CPI inflation surged to 7.0 percent from 6.1 percent in February, largely reflecting the impact of geopolitical spillovers. Food inflation increased by 154 basis points to 7.5 percent and core inflation rose by 54 bps to 6.4 percent.
The rapid rise in inflation is occurring in an environment in which inflationary pressures are broadening across the world. The IMF projects inflation to increase by 2.6 percentage points to 5.7 percent in advanced economies in 2022 and by 2.8 percentage points to 8.7 percent in emerging market and developing economies, percentage points to 5.7 percent in advanced economies in 2022, and by 2.8 percentage points to 8.7 percent in emerging market and developing economies.
The Governor finally added that “We, in the RBI, remain steadfast in our commitment to contain inflation and support growth. Inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth. The biggest contribution to overall macroeconomic and financial stability as well as sustainable growth would come from our effort to maintain price stability,”