RBI hikes repo rate by 40 bps on inflation worries, equities plunge

New Delhi, May 4

Reserve Bank of India Governor Shaktikanta Das on Wednesday said that the Monetary Policy Committee (MPC) of the central bank, in an off-cycle meeting, hiked the repo rate by 40 basis points (bps) to 4.40 per cent with immediate effect.

Repo rate is the rate at which the central bank lends short-term funds to banks. The RBI has cut the repo rate by 250 basis points since February 2019 to help revive the growth momentum. The Monetary Policy Committee has been on a prolonged accommodative stance to support the growth.

Also, the case reserve ratio has been hiked by 50 basis points to 4.5 per cent.

The move was taken in order to contain inflation.

The ongoing geopolitical tensions are pushing inflation higher in major economies besides the crude oil price also being volatile and above $100 per barrel.

Edible oil shortage is due to the conflict and ban by exporters, said Das.

"The decision today to raise the repo rate may be seen as a reversal of rate action of May 2020. Last month, we had set out a stance of withdrawal of accommodation. Today's action needs to be seen in line with that action," Das said.

"I would like to emphasise that the monetary policy action is aimed at containing inflation spike and re-anchoring inflation expectation," Das said. "High inflation is known as detrimental to growth."

Das, however, added that monetary stance remains accommodative and actions will remain calibrated.

Most importantly, the unscheduled announcement by the central bank surprised the equity markets as it nose-dived right after.

Sensex tanked nearly 1,100 points, whereas Nifty over 300 points.