RBI raises the repo rate and the cash reserve ratio

In a surprise move, the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) raised policy rates by 40 basis points (bps) today, ahead of its scheduled meeting in June.

The repo rate now stands at 4.40%, the standing deposit facility (SDF) at 4.15%, and the marginal standing facility (MSF) at 4.65%.

This is the first hike since the Covid-19 pandemic began, and restores the repo rate to the April 2020 level. However, it remains below the pre-pandemic rate of 5.15% in February 2020.

The RBI also increased cash reserve ratio (CRR) requirement by 50 basis points (bps) to 4.50%. This will take out a large quantum of liquidity from the banking system, since CRR is the share of deposits banks are mandated to park with RBI. The sudden move follows a series of gradual measures to withdraw excess liquidity, starting from the use of variable rate reverse repo operations since August 2021 to restoring the policy corridor under the liquidity adjustment facility to the pre-pandemic width of 50 bps.