Editorial: RBI’s volte-face shows a sense of urgency

The Reserve Bank of India on Wednesday surprised everyone by carrying out an unscheduled increase of 40 basis points in the benchmark rates with immediate effect, in order to tame inflation.

The Monetary Policy Committee had met in the first week of April and the next meeting is scheduled for June.

The benchmark rates have not been changed since August 2018 and they remained at 4%.

The RBI had all along emphasised that its main focus was to revive the economy from the Covid19-induced slowdown by keeping the rates low and curbing inflation was not a priority.

Hence the RBI’s latest act of calling an emergency Monetary Policy Meeting and its members unanimously voting to increase the benchmark rates by a massive 40 basis points has raised many eyebrows. The fact that the central bank was not even willing to wait for a month to announce a hike reflects its sudden sense of urgency.

The RBI has also increased the cash reserve ratio of banks by 50 basis points to 4.5%. This is the percentage of cash deposits commercial banks have to hold as reserves with the central bank. This new norm is effective from May 21 and will remove Rs 87,000 crore of liquidity from the system.

Inflation has been a vexing problem for most Indian households, the retail inflation in March had surged to a 17-month high of 6.95% on the back of costlier food items. The wholesale inflation has been in double-digit territory for the past 12 months.

But the central bank had all along taken an ‘accommodative’ stand and decided against tinkering with the interest rates. Even during the last Monetary Policy Meeting in April, when many countries had either increased the rates or were planning to do so, in the wake of the Ukraine crisis, the RBI chose to keep the rates. However, it had increased the annual forecast of inflation to 5.7%, from an earlier projection of 4.5%.

It may be noted that March inflation only partially takes into account the rise in fuel prices, as it happened in a phased manner after March 10. Hence its overall impact will be fully felt in the yetto-be-released April inflation figures. This could be one of the reasons why the RBI chose to shelve its earlier stand.

The rate hike will affect corporates and those who plan to take a loan as the equal monthly installments could go up. Those with existing loans will also feel the heat once their respective banks reset the interest rates. However, it will benefit those who have invested in fixed and recurring deposits, as they stand to get better returns.