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In an unprecedented move, the Reserve Bank of India (RBI) on Wednesday has raised interest rates by 40 basis points in an attempt to tame rising inflation.

RBI announced the increase in repo rate to 4.40 percent with immediate effect. Repo rate is the rate at which the RBI lends money to the banks.

This is the first time since May 2020 that RBI has raised the interest rates and Governor Shaktikanta Das in his address noted,

“The sharp acceleration in headline CPI inflation in March 2022 to 7 percent was propelled, in particular, by food inflation due to the impact of adverse spillovers from unprecedented high global food prices. Nine out of the twelve food sub-groups registered an increase in inflation in March.”

The stock markets reacted very negatively to this development, with the BSE Sensex crashing by 1306.96 points on Wednesday.

The rising inflation in the country had led to calls for the RBI to increase the interest rate to curb the price rise. The increase in prices, especially of commodities, has been triggered by multiple global factors like Russia-Ukraine conflict, high crude oil prices, global supply chain disruptions etc.

In recent times, rising inflation has been faced by every country across the globe, especially the developed economies. In the US, The Fed announced its first interest rate hike in three yearsm in March this year, and is expected to announce another increase to rein in the galloping prices.

It now remains to be seen how long the RBI will continue with this interest rate environment as there needs to be a balance between taming the inflation rate as well as supporting growth.

The Monetary Policy Committee in its note said, “The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.”