India’s largest bank has raised interest rates from surprisingly low on Wednesday to accelerate inflation, shocking markets and increase 10-year bond yields to a record high in three years.
The Reserve Bank of India has increased its repo rate Interest rate to banks – by 40 points to 4.40%, at its first rate change in two years and an increase in its first rate in about four year Many analysts were expecting an increase in prices at the next scheduled Monetary Policy Committee meeting in June, and markets were caught unawares as they were unaware that a six-member team had met outside the cycle.
“The MPC has noted that domestic economic activity is significantly improving in the lines expected to be in April,” Governor Shaktikant Das said in an online address.”At the same time, the MPC has determined that the inflation situation justifies the appropriate and timely response with strong and resilient measures to ensure that the second round of economic shocks is met and that the long-term inflation expectations are maintained,” he added. The central bank also increased the bank deposit (CRR) rate, or part of the deposit banks require to set aside the RBI as cash, by 50 points to 4.50% from 21 May. Das said the CRR increase would cost an estimated R870 billion ($ 11.4 billion) to the market.
Despite the resilience, the MPC also unanimously decided to continue to support growth which it said is growing stronger but still facing headaches. “Our monetary policy actions today – aimed at lowering inflation and emphasizing inflation expectations – will strengthen and strengthen the prospects for medium-term economic growth,” Das said.
India’s 10-year bond yield rose to 7.42%, the highest rate since May 2019, shortly after the policy decision, while the rupee strengthened against the dollar to 76.21.The 10-year yield closed at 7.38% while the rupee ended at 76,4125 dollars.
Risk of inflation
Das said the sharp rise in inflation in March to 7%, the highest in 17 months, was largely due to food inflation and the impact of unprecedented food prices on the world. He said the pressure on food inflation was likely to continue. Inflation is now above the RBI’s tolerance band limit of 2% -6% for the third consecutive month. The RBI target for medium-term inflation is 4%. A major contribution to macroeconomic stability and financial stability and sustainable growth will come from our efforts to keep prices stable, “said Das.
The rate of repercussions, the rate at which banks lend to the RBI, declined to a low level in May 2020, when the economy was volatile since the outbreak of the epidemic, and the rate held unchanged from that level at the last MPC meeting the moon. Many analysts had expected prices to increase at the next six-member scheduled panel meeting on June 6-8, and this week’s two-day MPC meeting caught the financial markets by surprise.
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