RBI hikes repo rate by 40% to tackle inflation

RBI hiked the repo rate by 40 basis points (bps) to 4.4 percent and the cash reserve ratio by
50 basis points to 4.5 percent in a surprise statement to combat growing global inflation on
May 4. The unexpected move, the first since August 2018, sparked a surge in interest rates
at some institutions, as well as an increase in EMIs on home, vehicle, and personal and
corporate loans.

In an off-cycle meeting, RBI Governor Shaktikanta Das assessed the latest economic
developments, particularly the impact of the war in Ukraine, and decided to raise policy
interest rates in an effort to slow increasing inflation. "As the war progresses and sanctions
and retaliatory acts get more severe, shortages, volatility in commodity and financial
markets, supply disruptions, and, most concerningly, persistent and spreading inflationary
pressures become more intense with each passing day," Mr. Das warned.

Russia's invasion of Ukraine, as well as additional sanctions imposed by European countries

and the US, soared the prices of crude oil and coal, wheat, edible oil, and other critical
commodities, forcing the MPC to immediately hike the repo rate. For more than two years,
Indian householders' perceptions and expectations of inflation have been considerably
beyond the RBI's maximum tolerance level of 6%.

The repo rate is the interest rate at which a country's central bank loans money to
commercial banks in the event of a liquidity crisis. Monetary authorities utilise the repo rate
to limit inflation. If India experiences inflation, the RBI would raise the repo rate, discouraging
other banks from borrowing from the RBI. Increased repo rates mean that ordinary people
will have to struggle for loans, as well as pay higher EMIs on housing and vehicle loans.
People are less willing to take chances in company and minimise tiny expenses, such as
terminating employees, during this period, anticipating less work in the market, therefore
unemployment is another result of growing prices.

The RBI requires banks to keep a part of their money in cash so that it can be returned to
customers in times of need. The Cash Reserve Ratio is the percentage of money retained in
the form of cash (CRR). The cash reserve can be kept in the bank's vault or delivered to the
RBI; banks do not get interest on CRR. It has now been raised by 50 basis points to 4.5
percent.

A 40 basis point increase in the repo rate is not as dramatic as we expect, but continued
raises will have a considerable impact on the economy. However, this increase may have
the consequence of delaying the rate of the post-pandemic economic recovery and putting
the brakes on the recovery process. If demand suffers, capacity utilisation for enterprises
across industries may suffer, and India Inc. may postpone its investment plans. Following
the decision by the RBI, several banks altered their interest rates. The interest rate on house
loans and auto loans will rise. Following the RBI statement, the stock market plummeted,
with the Sensex losing nearly 1307 points and the market losing 86000 crores.