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Banking Central | What does the RBI rate hike mean for the common man

  • calendar 09-May-2022
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Banking Central | What does the RBI rate hike mean for the common man

Reserve Bank of India (RBI) Governor Shaktikanta Das announced a 40-basis-point hike in the key lending rate and raised the cash reserve ratio (CRR) by 50 basis points in an unscheduled announcement on May 4. The move surprised markets pushing Benchmark Sensex down by 1474 points in the intra-day trade and pushing the yield on India's benchmark 10-year bond to 7.38 per cent.One basis point is one hundredth of a percentage point. The revised repo rate now stands at 4.40 percent and the CRR at 4.5 percent.Today’s decision should be seen as part of the central bank’s announcement last month of gradual withdrawal from easy money regime, Das said. “The decision today to raise repo rate may be seen as reversal of rate action of May 2020. In last month, we had set out a stance of withdrawal of accommodation. Today’s action need to be seen in line with that action.”The surprise move came ahead of an expected rate hike from the US Federal reserve and in the backdrop of retail inflation persistently staying above the central bank’s comfort zone.This is the first such unscheduled statement from the RBI governor since the start of the pandemic in 2020. The announcement surprised the markets, pushing up bond yields and putting pressure on the equity indices.Despite the continuation of accommodative stance, today's rate action confirms the reversal of the easy money regime the central bank had pursued during the start of the pandemic. In its response to the pandemic, monetary policy had shifted gears to an ultra-accommodative mode, with a large reduction of 75 basis points in the policy repo rate on March 27, 2020 followed by another reduction of 40 basis points on May 22, 2020.However, in the April round of monetary policy, the central bank had signaled exit from the easy money stance with several liquidity management measures in alignment with the shift in the monetary policy stance, including restoration of a symmetric LAF corridor around the policy repo rate and the introduction of the standing deposit facility

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