In a surprise move, the Reserve Bank of India announced an increase in key interest rates by 40 basis points, the first increase since August 2018 and the sharpest in nearly 11 years, as it shifted gears to tame surging prices.
Rising prices against the backdrop of the war in Ukraine and breakdown of supply chains have emerged as a key policy challenge, prompting central banks around the world to raise interest and tackle soaring prices. Home loans and other retail loans as well as those availed of by businesses will get costlier as around 40% bank credit is linked to the repo rate, which is what banks earn on the overnight funds that they park with the RBI. The monetary policy committee also increased the cash reserve ratio (share of deposits banks keep with RBI) by 50 basis points to 4.5% to suck out some cash from the system. The repo rate has been revised to 4.4%. A 40-basis-point increase (100 basis points equal one percentage point) in key policy rates will raise the EMI on a Rs 1-crore home loan of a 15-year tenure by Rs 2,176.
The decision sent the market crashing with the sensex closing 1307 points lower. Between the time the RBI governor’s statement started and market closed, the index fell 900 points.