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Repo rate hiked by 40 bps: 5 reasons why RBI Guv Das shocked the market

Repo rate hiked by 40 bps: 5 reasons why RBI Guv Das shocked the market

The lending rates are now all set to increase for the home, car and other retail borrowers. The retail loans linked to external benchmarks will see an immediate hike soon. The cost of funds for India Inc. will also move northwards.

The repo rate is the rate at which the bank borrows funds from the RBI for their temporary liquidity mismatches The repo rate is the rate at which the bank borrows funds from the RBI for their temporary liquidity mismatches

Nearly after two years , the Reserve Bank of India's (RBI) monetary policy committee (MPC), which met between May 2 to May 4, has decided to hike the repo rate by 40 basis points to 4.40 per cent. The repo rate is the rate at which the bank borrows funds from the RBI for their temporary liquidity mismatches. There are five reasons that prompted the RBI Governor to make an unscheduled announcement today for a rate hike.

Global inflation rearing its head

The inflation globally has been on the rise in the last one year. The inflationary pressure has further aggravated post the Russia-Ukraine conflict and the COVID-induced lockdown in several Chinese cities. The US is already witnessing a record level of inflation. The inflation in the US shot up to 8.4 per cent year-on-year (YoY) in March, which is a 41-year high. At some stage in future, the global developments on higher interest rate will impact India severely. 

Higher crude oil prices

The international crude oil prices are at over $100 per barrel. The Russia-Ukraine conflict has further aggravated the oil problem.  There is already a passthrough in the domestic prices by way of higher petrol, diesel and gas prices. There is also a threat of imported inflation via currency as the rupee value against the US dollar has been depreciating. Even if the crude price remains constant , the currency depreciation will increase the landing prices in India.  

Higher global food prices

Governor Das said that global food prices touched a new record in March and have firmed up even further since then. "Inflation sensitive items relevant to India such as edible oils are facing shortages due to the conflict in Europe and export bans by key producers. The jump in fertiliser prices and other input costs has a direct impact on food prices in India," said Das. 

Rising domestic inflation

The domestic retail inflation or CPI has been on an upward trajectory from December last year. The CPI was 5.59 per cent in December 2021. It moved to 6.01 per cent in January, 6.07 per cent in February and 6.95 per cent in March this year. In its April policy, the RBI has upped the forecast for inflation from 4.5 per cent to 5.7 per cent in 2022-23. Governor Das today said that the MPC expects inflation to rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second round effects.

Normalisation of global monetary policy

Globally, the central bankers are withdrawing the surplus liquidity and raising interest rates. The US Fed has already hiked the rates and more hikes are expected in today's meeting of the Fed. The Fed chairman has also indicated that they are preparing to trim the size of the balance sheet. The US balance sheet is currently at $9 trillion.

The RBI Governor said that the normalisation of monetary policy in major advanced economies is now expected to gain pace significantly – both in terms of rate increases and unwinding of quantitative easing as well as rollout of quantitative tightening. "These developments would have ominous implications for emerging economies, including India, " said Das. 

Also read: Sensex crashes over 1400 points as RBI hikes repo rate by 40 bps to 4.40%

Also read: RBI Guv Das announces hike in interest rate by 40 bps to 4.40% in 'off-cycle' MPC meet