Why did RBI decided to hike rates and hike CRR also?

On Wednesday, RBI literally stole the thunder from under the nose of the Fed by pre-empting the monetary dilemma. The RBI went ahead and proactively raised the repo rates by 40 bps. This took the repo rates to 4.40% while the SDF rate stands modified to 4.15% while the bank rate stands modified at 4.65%. This was much larger rate hike than the 25 bps that was generally being anticipated in the month of June.

In addition, RBI sought to amplify the impact of the rate hike by hiking CRR (cash reserve ratio) by 50 bps from 4% to 4.5%. This the liquid reserve maintained by the banks with the RBI. This move is likely to absorb liquidity to the tune of Rs.87,000 crore from the financial markets. The RBI has tried to combine a combination of rate hikes and liquidity curbs to manage rising inflation This is in addition to the ongoing VRRRs.