The Reserve Bank of India (RBI) upped its key interest rate by 40 basis points in a surprise decision on Wednesday in a bid to contain inflation, which has stayed persistently above goal in recent months.
The increase in the repo rate, which is the rate at which the RBI lends to commercial banks, from a record low of 4% to 4.40 percent is the first since August 2018, and it is also the first time the RBI Governor-led monetary policy committee (MPC) has held an unscheduled meeting to raise interest rates.
The Reserve Bank of India recently increased the cash reserve requirement (CRR) by 50 basis points to 4.5 percent, requiring banks to deposit more money with the central bank and leaving them with less money to lend to customers.
RBI Governor Shaktikanta Das stated in a video address announcing the rate rise decision that this will drain Rs 87,000 crore of liquidity from the banking system. He, on the other hand, made no mention of the reverse repo rate, which remains unchanged at 3.35 percent.
The current standing deposit facility rate is 4.15 percent, whereas the marginal standing deposit facility rate and the bank rate are both 4.65 percent. At a time when global inflation is rapidly rising, the MPC maintained its accommodating monetary policy stance, which means it can slash interest rates to stimulate growth.
Persistent inflationary pressures are growing more pronounced, especially in the food sector, according to Das, who also warned that if prices remain at this level for "too long," expectations will become unanchored. "To keep the Indian economy resolute on its path to sustained and inclusive growth, inflation must be tamed," he said.
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