Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) on Wednesday, August 1, raised the interest rate by 0.25 per cent on inflationary concerns.
In its third bi-monthly policy of the current fiscal, the RBI decided to raise benchmark repo or the short term rate at which it lends to other banks by 25 basis points, or 0.25 per cent, to 6.5 per cent.
The reverse repo rate – rate at which the RBI borrows from commercial banks – under the liquidity adjustment facility (LAF) stands adjusted to 6.25% and marginal standing facility rate and Bank Rate to 6.75%.
The RBI cited rising crude oil prices, volatility in global financial markets, and uncertainty around the full impact of MSP (minimum support price) on inflation among the key factors for its rate-hike decision.
However, the 6-member MPC headed by RBI Governor Urjit Patel kept its stance at neutral. For July-September, it pegged CPI-based retail inflation at 4.2 per cent which it saw firming up to 4.8 per cent in the second half of the current fiscal, media reports said.
The projected inflation rate is above its targeted comfort level of 4 per cent.
RBI kept the GDP growth forecast for the current fiscal unchanged at 7.4 per cent and saw it at 7.5-7.6 per cent in the second half of the current fiscal.
The hike in June was the first time the benchmark lending rate was raised in over four years. This is now the first time since October 2013 that the central bank has raised the repo rate at two consecutive policy meetings.
For those who have taken loans from banks, the RBI’s latest development has come as a bad news. The hike would make home, car loan EMIs costlier.
Experts were surprised with RBI’s neutral stance, reported NDTV. “The hike was expected, but what is surprising is the stance has remained ‘neutral’. We were expecting that since this is the second consecutive hike in two policies, the stance would be changed to ‘tightening’,” Anagha Deodhar, Economist, ICICI Securities was quoted as saying.
RBI projected inflation at 4.6 per cent in second quarter of fiscal 2019, 4.8 per cent in second half of 2018-19 and 5 per cent in first quarter of 2019-20. In June, RBI had projected consumer inflation at 4.8-4.9 per cent in the first half and 4.7 per cent in the second half of 2018-19.
Annual consumer inflation hit 5 per cent in June, the eighth straight month it topped the RBI’s medium-term 4 percent target.
The next MPC meet which will be during the festive season may not see a rate increase. The next meeting of the MPC is scheduled from October 3 to 5, 2018.