MPC meet: RBI Governor announces hike in interest rate by 40 bps to 4.40 pc

Governor Shaktikanta Das of the Reserve Bank of India (RBI) announced a 40 basis point raise in benchmark interest rates to 4.40 percent with immediate effect on Wednesday. The statement follows a "off-cycle" meeting of the central bank's Monetary Policy Committee (MPC), chaired by Das, on the 2-4 May.

The MPC unanimously agreed to raise the policy repo rate by 40 basis points to 4.40 percent, effective immediately. 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. He also stated that sustained inflation (over 6%) is becoming more acute in his statement. "There is a risk that inflation may remain elevated at this level for an extended period of time, destabilising expectations," he warned. Das conducted an unplanned press conference today, a day before the Federal Reserve's FOMC minutes, in which rates are expected to be raised by 50 basis points.

Meanwhile, ahead of Das's remark at 2 p.m., the government bond market saw a significant selloff. The benchmark 10-year bond yield increased by nine basis points to 7.21 percent, while the benchmark stock index continued to lose ground, falling by 1.1 percent. 

The central bank left the benchmark interest rate at 4% in its April policy review and opted to withdraw its lenient approach in the future to ensure that inflation stays within the target range.

For the previous few months, retail inflation has been hovering just beyond the RBI's upper tolerance level. It increased to 6.95 percent in March from 6.07 percent in February, owing to an increase in food prices. On May 22, 2020, the central bank dropped the interest rate on its policy repo rate, or short-term lending rate, to a historic low in an off-policy cycle to boost demand.

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