India hikes rates in surprise monetary policy meeting, bond yields soar

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MUMBAI, May 4 (Reuters) – The Reserve Bank of India raised its key rate by 40 basis points to 4.40% on Wednesday to rein in rising inflation, taking markets by surprise with an unscheduled meeting of its board. of monetary policy.

The central bank has also increased the banks’ cash reserve ratio or the proportion of deposits that banks must set aside with the RBI in cash, by 50 basis points to 4.50% from the fortnight onwards. of May 21, 2022.

Despite the tightening, the MPC also unanimously decided to maintain a dovish stance to support growth.

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Governor Shaktikanta Das announced the first repo rate change in two years in a virtual address to the media.

“The MPC judged that the outlook for inflation warranted an appropriate and timely response with resolute and calibrated measures, to ensure that the second-round effects of supply shocks on the economy are contained and that expectations long-term inflation rates are firmly entrenched,” Das mentioned.

“The greatest contribution to overall macroeconomic and financial stability as well as sustainable growth would come from our efforts to maintain price stability,” he added.

The repo rate, the rate at which banks borrow from the RBI, was cut to an all-time high in May 2020, when the economy was reeling from the start of the pandemic, and the rate remained unchanged at that level. at an MPC meeting last month.

Most analysts were expecting rates to be raised at the six-member panel’s next scheduled meeting for June 6-8, and this week’s two-day MPC meeting caught financial markets off guard. The last time the RBI raised the repo rate was in August 2018.

“RBI felt compelled to act to restore its rapidly eroding credibility and anchor inflationary expectations,” said Ajay Bodke, an independent market analyst.

India’s benchmark 10-year bond yield jumped to 7.42%, its highest level since May 2019, while the rupee strengthened against the dollar to 76.26.

Several traders said the RBI likely wanted to act ahead of the conclusion of a US Federal Reserve meeting later in the global day. Many analysts expect the Fed to raise rates by 50 basis points.

India’s retail inflation accelerated to almost 7% year-on-year in March, its highest level in 17 months and above the upper limit of the 2-6% tolerance band of RBI for a third consecutive month. The RBI’s medium-term inflation target is 4%. Read more

Das said the surge in inflation was largely due to pressure on food prices, which are expected to remain high in the near term. April inflation data is expected to be released next week.

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Additional reporting by Chris Thomas, Abhirup Roy, Chandini Monappa and Euan Rocha; Editing by Simon Cameron-Moore

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