It raises CRR by 50 bps; EMIs in home, auto and other loans are likely to increase
Mumbai: Home, auto and other loan EMIs are likely to increase after the Reserve Bank of India (RBI) hiked its key interest rate by 40 bps in a surprise move on Wednesday in an effort to tame inflation that has remained stubbornly above target in recent months.
The increase in repo rate – the rate at which RBI lends to commercial banks – to 4.40% from a record low of 4% is the first since August 2018 as well as the first instance of the RBI Governor-headed monetary policy committee (MPC) holding an unscheduled meeting for raising interest rates.
The RBI also hike the cash reserve ratio (CRR) by 50 basis points to 4.5%, which will now require banks to park more money with the central bank and leave them with less to loan to consumers.
This would drain `87,000 crore of liquidity from the banking system, RBI Governor Shaktikanta Das said in a video address announcing the rate hike decision.
He, however, did not mention anything about the reverse repo rate and hence it remains the same at 3.35%. The standing deposit facility rate is now at 4.15% while the marginal standing facility rate and bank rate stand at 4.65%.
The MPC retained its accommodative monetary policy stance – meaning it can cut interest rates to support growth – at a time when globally inflation is rising alarmingly.
Persistent inflation pressures are becoming more acute, particularly on food, Das said, adding that there is a risk if prices stay at this level for “too long” and expectations become unanchored.
“Inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth,” he said.
Increases in fuel and food prices, exacerbated by the war in Ukraine and sustained pandemic-related supply chain disruptions, have been above the RBI comfort zone of 2-6% for three months in a row. Headline inflation in March rose to a 17-month high of 6.95% and it may be above the target band in April too.
The MPC is scheduled to meet on June 8 and analysts expect it to again raise the repo rate by at least 25 bps.
“The MPC judged that the inflation outlook warrants an appropriate and timely response through resolute and calibrated steps to ensure that second-round effects of supply-side shocks on the economy are contained and long-term inflation expectations are kept firmly anchored,” Das said.
The Governor, however, added that the monetary stance remains accommodative and actions will remain calibrated.
“In the MPC’s view, monetary policy response at this juncture would help to preserve macro-financial stability amidst increasing volatility in financial markets,” he added.
Deloitte India economist Rumki Majumdar said the rate hike was expected in June.
Sensex plummets 1,300 pts
Mumbai: Equities went into a tailspin on Wednesday after the Reserve Bank of India surprised the market with a mid-cycle rate hike in a bid to tame soaring inflation. After a choppy start, the 30-share BSE Sensex came under massive selling pressure following RBI’s interest rate hike, closing 1,306.96 points or 2.29% down at a two-month low of 55,669.03. This was its third straight session of loss.
On similar lines, the broader NSE Nifty tanked 391.50 points or 2.29% to finish at 16,677.60.
The market capitalisation of all BSE-listed companies tumbled by `6.27 lakh crore to stand at Rs 2,59,60,852.44 crore.
Bajaj Finance was the biggest loser in the Sensex pack, tumbling 4.29%, followed by Bajaj Finserv, Titan, IndusInd Bank, HDFC Bank, Maruti and RIL.
Only three constituents managed to finish higher – PowerGrid, NTPC and Kotak Mahindra Bank – rising up to 2.75%.
“The above 1,000 point crash in Sensex has soured the sentiments on the opening day of India’s largest IPO,” said V. K. Vijayakumar, chief investment strategist at Geojit Financial Services.