Ahead of the Federal Reserve meet scheduled for tonight, where a 50 bps intertest rate hike is widely expected; RBI took a preemptive step and at an unscheduled, seemingly ‘urgent’ meet, announced a 40-bps hike in rates, while maintaining the stance at “accommodative.”

This 40-bps hike is a direct reversal of the 40-bps rate cut RBI had announced in May’20 – RBI essentially took back what it gave to fight Covid to now fight the war pressures.

This means:

• Repo rate is now at 4.40%
• Standing deposit facility rate now stands at 4.15%
• Marginal standing facility rate at 4.65%
• Bank rate stand at 4.65%

RBI also hiked the Cash Reserve Ratio (CRR) by 50bps to 4.5%, effective 21^st May. This will immediately suck out around Rs.87,000 crore from the banking system.

Market naturally went into a tizzy and lost over 960 points and remains firmly in the red. Apart from this unexpected rate hike in India, the market has to now brace for a rate hike by the US Fed too. Clearly, this week holds all the promise of being extremely tumultuous.

Calling this a ‘resolute’ and ‘timely response’ the RBI Governor citied the following reasons for this hike:

• To ensure macroeconomic stability
• Rising inflationary pressure
• Losing traction of global economic recovery
• Situation is dynamic and fast-changing
• Rising oil prices at over $100/barrel percolating into local fuel prices
• High-frequency indicators suggest that food prices will remain high
• Further firming up of edible oil prices
• All these put acute upward pressure on inflation forecasts

This is a very proactive and practical but extremely significant move made by the RBI. If it had sat on the rates even now, while staying worried only about consumption and growth, the impact would have been disastrous. The rate hike is the perfect move and it does warn us all about the storm raging ahead as far as inflation in concerned.

We are likely to see banks announcing immediate loan rate hikes and yes, the impact will be felt all around. For now, things might look uphill but its best to always remain optimistic – lets be assured that the monetary policy is led by an able institution; its credibility is re-established.

Let’s internalize the quote which RBI Governor ended the policy with - I have had my share of disappointments, darkness, but my faith has conquered every one of my difficulties. In such uncertain times, optimism is all which will sail us through.