RBI Cites Inflationary Pressures In a Surprise Rate Hike

Arjun Pandit
04 May, 2022
New York City

In a surprise move, the Reserve Bank of India reversed its earlier stance on interest rate and lifted the key rate. 

The central bank increased repo rate 40 basis points to 4.4% and cash reserve ratio by 50 basis points to 4.5% from May 21. 

RBI Governor Shaktikanta Das announced the decision and said that the policy committee had voted unanimously to lift the rate after a meeting on May 4. 

The central bank said in an accompanying statement highlighted geopolitical tensions arising from the war in Europe, persistent supply disruptions, and food and energy price surge in the last six months. 

The RBI reiterated its medium term target for consumer price inflation at 4% with a 2% band.

The central bank also said it is  prepared to remove its accommodative stance to achieve its inflation target while supporting growth.  

The RBI lifted the repo rate for the first time since 2018 and cut the rate by 75 basis points in March 2020 at the outbreak of Covid-19 pandemic followed by another 40 basis point cut in May 2020. 

The central bank highlighted inflationary pressures and noted " core inflation is likely to remain elevated in the coming months, reflecting high domestic pump prices and pressures from prices of essential medicines. Renewed lockdowns and supply chain disruptions due to resurgence of COVID-19 infections in major economies could sustain higher logistics costs for longer."

Consumer prices in India accelerated in the last few months and reached 7% in March accompanied by food price increases. 

Since then, Indonesia has placed a ban on palm oil exports, energy prices have climbed higher, and runaway inflation has taken hold in domestic food prices. 

The next policy meeting at the central bank is scheduled on June 6-8.