In a surprise move, the Reserve Bank of India Wednesday hiked the key policy interest (repo) rate by 40 bps to 4.40 per cent with immediate effect in order to contain the spike in inflation and re-anchor the inflationary expectations of households.
RBI Governor Shaktikanta Das warned that the inflationary pressure may stay for a longer period than expected.
"Inflation must be tamed in order to keep the economy resolute. As we navigate through this difficult period, it is necessary to be sensitive to new realities," said Das as he announced the mid-policy MPC decision.
In his statement, he added that persistent inflation is becoming more acute. "There is a collateral risk that inflation remains elevated at this level for too long and can de-anchor expectations," he added.
The announcement came after the central bank's Monetary Policy Committee headed by Governor Shaktikanta Das met on May 2-4 in an "off-cycle" meeting. It comes ahead of the Federal Reserve FOMC minutes, which is expected to raise rates.
The RBI also raised the cash reserve ratio by 50 basis points to 4.5%. The action will lead to withdrawal of Rs 87,000 crore from the market.
This is the first increase in borrowing costs since August 2018 and the announcement came hours before the US Federal Reserve was expected to undertake its largest rate hike in two decades in response to accelerating inflation in the world's biggest economy.
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