In a surprise move, the central bank increased repo rate by 40 bps and the cash reserve ratio by 50 bps, rattling equity and bond investors. Many economists see inflation around 7 percent levels in the near-term and do not rule out a 25 bps rate hike in June
Economists had widely expected the central bank to change its stance to neutral before ushering in rate hikes of 100 to 125 basis points in the current calendar year
Image: Punit Paranjpe / AFP
After nearly two years, the Reserve Bank of India (RBI) has partly come full circle on interest rates. In a surprise move on Wednesday, its Monetary Policy Committee (MPC) unanimously voted to hike the benchmark repo rate by 40 basis points (bps) to 4.4 percent with immediate effect in an off-cycle meeting.
The rate setting panel, however, decided to remain accommodative even as it said it will focus on gradual withdrawal of liquidity to tame inflation while supporting growth. In line with the objective of policy normalisation, the central bank increased the cash reserve ratio (CRR) by 50 basis points to 4.5 percent with effect from May 21, which will drain out close to Rs 87,000 crore from the system.