RBI increases repo rate to 4.40%, Hike disappointing: PHD Chamber

Reserve Bank of India has hiked the policy repo rate by 40 basis points, taking it to 4.40 per cent. In a statement issued on Wednesday, the RBI said, on the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee- MPC at its meeting decided to increase the policy repo rate under the Liquidity Adjustment Facility - LAF by 40 basis points to 4.40 per cent with immediate effect. The statement further said, consequently the Standing Deposit Facility- SDF rate stands adjusted to 4.15 per cent and the Marginal Standing Facility- MSF rate and the Bank Rate to 4.65 per cent.Governor Shaktikanta Das said the decision was taken in view of rising inflation, geo-political tensions, high crude oil prices and shortage of commodities globally, which have impacted Indian economy.
The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. It said, these decisions are in consonance with the objective of achieving the medium-term target for Consumer Price Index (CPI) inflation of four per cent within a band of /- two per cent, while supporting growth. This was the first hike in policy rate since August 2018, which would increase the cost of borrowing for corporates as well as individuals.The latest surprise hike completely reverses the Covid-support off-cycle rate cut in May 2020. 

The RBI announcement immediately pushed equity benchmarks to slump sharply with BSE Sensex plunging more than 1,400 points in the intra-day trade to close at 55,669.03. While the NSE Nifty settled below 16,700 after recording a fall of 391 points. The stock market and the interest rates have an inverse relationship. Every time the central bank increases the repo rate, its immediate impact is seen on the stock markets. An increase in interest rates means an increase in savings and a reduction in the flow of capital to the economy, which results in slump in stock markets..

Though RBI’s step is considered to address the inflationary pressure, 40 bps hike in the repo rate and 50 bps hike in Cash Reserve Ratio (CRR) will hurt the consumer and business sentiments. The economy is still recovering from the pandemic impact of Coronavirus, yet there are worries from geo-political developments, such as likely contagious impact on trade and finance, said Pradeep Multani, President, PHD Chamber of Commerce and Industry. Industry Body has urged RBI to remain accommodative and repo rate should come down to the level of 4%. Any increase in the interest rate will further impact the costs of doing business, which is already high viz-z-viz high raw material cost.