MUMBAI: The Reserve Bank of India on Wednesday delivered a one-two punch on borrowers. It raised key policy rates by 25 basis points, for the first time in four years, potentially increasing EMIs and dropping hints on higher price rises this financial year than previous projections.
The benchmark repo and reverse repo were raised to 6.25 and 6 per cent, respectively, driven by rising inflation, higher oil prices and weakening currency. The last time rates were increased was in January 2014.
Repo rate is the rate at which banks borrow money from RBI and reverse repo rate is the rate at which the banking regulator borrows money from commercial banks.
Following Wednesday’s rate hike, markets gave a polite golf clap with bond yields correcting marginally to 7.89 per cent, while rupee traded 0.1 per cent higher.
The rate-cut cycle that began in January 2015 saw repo rate sliced to the bone by 200 bps, yet credit growth remained muted.
The upshot is Wednesday’s hike doesn’t yet mark a return to the bad old days when rates were in excess of 10 per cent. Why? Although the apex bank joins other central banks to raise rates, unlike others, RBI isn’t yet embarking on a rate-hike cycle.
It has also stuck to its ‘neutral’ stance, which means it is keeping all options open. Market pundits, however, believe it’s a sure signal of a rate-hike cycle as inflation will likely overshoot RBI’s estimates, considering two peace-breaking factors — the impact of MSP and weakening rupee — both of which RBI had kept outside its ambit citing inadequate data.Brokerages also decidedly priced in another 25 bps hike in October if not August.
In its second bi-monthly statement for FY19, the Monetary Policy Committee revised its inflation forecasts to 4.8-4.9 per cent (earlier prediction was 4.7-5.1 per cent) for the first half of this fiscal and to 4.7 per cent in the second half from 4.4 per cent projected earlier.
Still, it drew confidence on growth outlook saying the output gap nearly closed, capacity utilisation was improving, credit offtake was better, investment activity was picking up, and consumption remained robust. Hence, despite the upside risks to inflation, its stance was maintained neutral.
