1 / 6Reserve Bank of India (RBI) Governor Shaktikanta Das in a surprise address on May 4 announced a hike in key interest rate by 40 basis points to 4.40 percent. This is the first-rate hike since August 2018 and the first instance of the MPC making an unscheduled increase in the repo rate. By increasing the cost of borrowing money, RBI hopes to reduce the money sloshing around in the system and today's rate hike is expected to drain out over Rs 83,700 crore from India's financial system. Let's take a look at the RBI governor's announcements and what do they mean.
2 / 6As of April 8, 2022, there were total deposits in the system of Rs 1,67,42,309 crore. With the CRR hike, the central bank aims to withdraw liquidity to the tune of Rs 83,711.55 crore.
3 / 6The decision to hike rates after nearly 44 months was taken to contain inflation, which has remained above the 6 percent target for the last three months.
4 / 6Apart from rising inflation, Das said that the MPC took into consideration geo-political tensions, high crude oil prices and shortage of commodities globally, which are impacting the Indian economy.
5 / 6While the inflation has remained above the 6 percent target since January, Das said the inflation print in April is also likely to be high. The retail inflation print for March stood at 6.9 percent.
6 / 6So what does this mean? Sustained high inflation hurts savings, investment, competitiveness and output growth in the long term. It has adverse effects on the poor and erodes their purchasing power. "I would, therefore, like to emphasise that our monetary policy actions today – aimed at lowering inflation and anchoring inflation expectations – will strengthen and consolidate the medium-term growth prospects of the economy," the RBI governor explained.
