February 22, 2025

Surprise Off-Cycle Rate Hike By RBI

By Our Editorial Team
First publised on 2022-05-05 02:50:34

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Less than a month after the regular MPC meeting decided to hold rates and bat for growth while keeping an eye on inflation, the RBI changed course on Wednesday and increased the repo rate by 40 basis points while raising the CRR (cash reserve ratio or the amount of money banks are to park with the RBI) by half a percentage point in an unexpected move in an off-cycle meeting. The combined effect of these two measures will be to suck out Rs 87000cr of the money floating in the economy and make loans costlier. The bank said it was forced to intervene since inflation was already and the geopolitical situation showed that supply constraints were unlikely to become normal in a hurry leading to uncertainty over inflationary trends. Thus, the apex bank has, while maintaining the accommodative stance, chosen to prioritize inflation over growth more forcefully and indicated that tight money policy is likely to rule after four years of easy money policy.

RBI governor Shaktikanta Das had said after the last meeting that "in the sequence of priorities we have now put inflation before growth. Stance continues to be accommodative and with an eye on withdrawal of accommodation." With the bank's forecast about inflation going horrendously wrong for the last several announcements and with Central banks the world over tightening monetary policy to combat inflation, it was obvious that the RBI would also do the same. But the off-cycle move took financial markets by surprise and the stock markets crashed after the announcement.

Further, the current inflation the world over is cost-push inflation that is being fueled by supply side constraints and rising prices of fuel and commodities. It is not a demand-pull inflation that can be tamed by only reducing money supply or raising interest rates. Although macro-financial stability can be achieved by adjusting rates or sucking out extra money floating in the economy, since consumer demand in India is stagnant, these measures alone are unlikely to help in taming inflation. In fact, if economic sentiments sour due to higher rates, this could even lead to slowdown in growth, which is the last thing India wants as the economy is showing signs of recovery.