RBI raises repo rate by 25 basis points to 6.50 percent, keeps 'neutral' stance

The rupee also strengthened marginally to 68.50 to the dollar from 68.54 before the announcement, but came off highs to trade at 68.58 to the dollar.

Published: 01st August 2018 03:34 PM  |   Last Updated: 02nd August 2018 04:31 AM   |  A+A-

The Reserve Bank of India (RBI) Governor Urjit Patel. (File | Reuters)

By Reuters

MUMBAI: The Reserve Bank of India raised interest rates for the second straight meeting on Wednesday, but retained its "neutral" stance as it aimed to contain inflation while not choking growth.

The RBI's Monetary Policy Committee (MPC) raised the repo rate by 25 basis points to 6.50 percent. It is the first time since October 2013 that the rate has been increased at consecutive policy meetings.

In June, the MPC also increased the key rate by 25 bps.

The rate action was in line with a Reuters poll last week, which showed 37 of 63 economists expecting a rate increase.

"The swiftness with which the central bank has responded to the jump in inflation should prevent the need for very aggressive policy changes in the future," Capital Economics analyst Shilan Shah said in a note.

Indonesia's central bank has been the most aggressive Asian one this year, hiking its benchmark rate 100 basis points between mid-May and the end of June.

In Indonesia's case, the main reason to hike has been its fragile currency. For the RBI, inflation is the central concern.

While the RBI on Wednesday marginally trimmed its inflation projections for the current quarter, the central bank said its inflation projections beyond that remain "broadly unchanged".

India's annual consumer inflation hit 5 percent in June, the eighth straight month in which it topped the RBI's medium-term 4 percent target.

Global crude oil prices have surged nearly 20 percent this year and crossed $80 a barrel in May, their highest since 2014.

This has driven the prices of fuel - the biggest item on India's import bill - to record highs at a time the rupee is testing new life lows, raising the threat of imported inflation.

Indian monsoons, one of the largest determinants of the inflation path, have been erratic and patchy in several regions this year, muddying the outlook for winter-harvested crops and adding to inflationary pressures.

'MONTHS OF TURBULENCE'

The MPC warned that "rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity."

At a news conference, RBI Governor Urjit Patel said "We've already had a few months of turbulence behind us and it looks like that this is likely to continue. For how long, I don't know."

The governor said trade skirmishes have "evolved into tariff wars and now we're possibly at the beginning of currency wars. Given this, we have to ensure that we run a tight ship on the risks that we control to maximise the chances of ensuring macro-economic stability and continuing with the growth profile of 7-7.5 percent."

Five of the six members on the rate panel voted for the rate increase.

The reverse repo rate was also raised by 25 basis points, to 6.25 percent.

Bond markets took comfort from the RBI's less hawkish than expected statement, with yields easing sharply from the day's high while the rupee strengthened. The 10-year benchmark bond yield fell to 7.73 percent after briefly rising to 7.84 percent soon after the decision. It had ended at 7.77 percent on Tuesday. The Indian rupee was at 68.49 to the dollar, from Tuesday's close of 68.55.

Expert views

KUNAL SHAH, SENIOR VP & FUND MANAGER, KOTAK MAHINDRA LIFE INSURANCE, MUMBAI

"The tone of policy statement is broadly neutral. I think what they have delivered is somewhat concluding the expected increase in inflation rather than the realised inflation because realised inflation has been running lower than forecast. So, maybe some expectation of MSP (minimum support price)-related increase in inflation, and they want to pre-emptively be cautious and deliver a rate hike, and that is what I think the market is expecting.

"Inflation continues to remain under control. Even today, the Reserve Bank of India has not revised its inflation forecast... I think even the RBI is comfortable with the projected inflation, but they are not comfortable with the unexpected rise in inflation... so they just gave a pre-emptive hike, otherwise they could have increased their inflation projections, which they have not done."

DHANANJAY SINHA, HEAD OF INSTITUTIONAL RESEARCH, EMKAY GLOBAL FINANCIAL SERVICES LTD, MUMBAI

"We were expecting rate hikes to happen, and the Reserve Bank of India seems to have taken a positive view on the growth momentum. I think the rate hike decision is fairly justified based on the assessment of various factors which influence inflation.

Also, we seem to be clearly following the core inflation trend which is on the rising side... which is good. The increase in commodity prices, the rupee depreciation, higher rural spending would all affect inflation.

The rupee depreciation has implications on inflation and liquidity in the money markets. However, right now, its impact on liquidity is larger and more relevant in terms of monetary policy decisions."

ANAGHA DEODHAR, ECONOMIST, ICICI SECURITIES, MUMBAI

"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".

They have not quantified the impact of MSP (minimum support prices) on inflation, or when MSP will start affecting inflation - whether it will be in October or earlier than that. I would have liked to see some clarity on that.

We are expecting at least one more hike this financial year.

I don't think rupee will be a key factor in the Reserve Bank of India's rate decision because they have repeatedly said they do not target any specific value of rupee - they just want to curb volatility.

The high-frequency indicators show that growth has been pretty good - we expect Q1 growth to be between 7.6 percent and 7.7 percent. With the implementation of MSP hike, I expect H2 inflation will be higher than the initial forecast."

SHASHANK MENDIRATTA, INDIA ECONOMIST, ANZ BANK, BANGALORE

"The tone of policy seems slightly on the hawkish side despite RBI tinkering only marginally with its second-half inflation projection. The RBI continues to reiterate long-standing risks to inflation and in particular oil prices remain a key risk.

HRA revision by the state government is another item on the RBI's radar. Another factor is MSP. A part of the MSP increase has already been incorporated by the RBI in June inflation projection, and the marginal increase in inflation projection this time is due to higher than historical revision in MSP.

The rupee will remain under pressure due to worsening domestic fundamentals and capital outflows.

The case for another hike is not off the table, there could be one in October."



Comments(1)

Disclaimer : We respect your thoughts and views! But we need to be judicious while moderating your comments. All the comments will be moderated by the newindianexpress.com editorial. Abstain from posting comments that are obscene, defamatory or inflammatory, and do not indulge in personal attacks. Try to avoid outside hyperlinks inside the comment. Help us delete comments that do not follow these guidelines.

The views expressed in comments published on newindianexpress.com are those of the comment writers alone. They do not represent the views or opinions of newindianexpress.com or its staff, nor do they represent the views or opinions of The New Indian Express Group, or any entity of, or affiliated with, The New Indian Express Group. newindianexpress.com reserves the right to take any or all comments down at any time.

  • Jp.Antony

    Good decision by RBI
    4 years ago reply
flipboard facebook twitter whatsapp