Monetary policy: RBI hikes repo rate by 25 basis points to 6.25%

07 June, 2018, 05:10 | Author: Eric Barnett
  • Economists expect all monetary policy committee members to concur with RBI deputy governor Viral Acharya’s view on ‘withdrawal of accommodation

Governor Urjit Patel arrives to attend a news conference after a monetary policy review in Mumbai, June 6, 2018.

The six-member monetary policy committee of the Reserve Bank of India (RBI) has unanimously made a decision to increase the key policy rate or the repo rate by 25 basis points to 6.25% as inflation outlook worsens due to a rise in crude oil prices.

The word on the street was that the central bank may wait until August before hiking the key repo rate.

A majority of the economists in a Reuters poll conducted ahead of the second monetary policy review this fiscal and market mavens had expected the RBI to hold off on a rate increase until August. "Given the global conditions - rising oil prices, the Fed's rate policy and the fact that other emerging markets have already begun raising rates - RBI should have probably raised rates earlier".

It attributed the hike to both domestic considerations which are causing an increase in inflation, as well as worldwide ones like the US Fed's stance with respect to unwinding of its balance sheet and guidance on interest rates.

After falling for three consecutive months, retail inflation in April rose to 4.58 per cent, wholesale inflation stood at 3.18 per cent which was four month high in April. "We expect one more interest rate hike by at least 25bps during the calendar year 2018, whereas we can not rule out the possibility of two rate hikes by the end of the financial year 2018-19", said Sabnavis.

"Actually, it is not conflicting at all".

"The neutral stance leaves all options open. other central banks do the same, there is no contradiction here", he said in response to a query. So, there is tension between the two.

"We have kept the neutral stance as well as responded to the risks to inflation visible in recent months". The RBI has taken a neutral stance.

The repo rate increase is likely to raise the cost of funds for industry as well, as banks mull lending rate hikes.

In a veiled warning on the need to keep to the fiscal discipline, the MPC said, "It is important that public finances do not crowd out private sector investment activity at this crucial juncture".

RBI retained the GDP growth for the financial year 2018-19 at 7.4 %.

"After incorporating a 50-bps rate hike, and also assuming there will be tax cuts to be announced, we now expect GDP growth at 7.3 pct vs 7.4 pct in FY19".

Retail inflation in India recently touched 4.58 per cent, above the target set by the RBI's monetary policy committee (MPC).

"The recent hike in crude prices and better GDP for the last quarter of FY18 suggest inflation trajectory may be on the higher side". The RBI statement noted that the "12% increase in the price of Indian crude basket (in April), which was sharper, earlier than expected and seems to be durable".

The RBI governor said one of the reasons why the central bank had put the policy rate on hold for such a long time was the nascent recovery in the economy.

"An abiding concern of the committee has been that the impulses of growth were nascent".

The MPC noted that domestic economic activity has exhibited sustained revival in recent quarters and the output gap has nearly closed.


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