NEW DELHI: In line with market expectations, the monetary policy committee (MPC) of the Reserve Bank on Wednesday hiked repo rate by 25 basis points to 6.50 per cent in its third bi-monthly monetary policy review of 2018-19.
Repurchase rate, or repo, is the rate at which the RBIlends money to commercial banks in the event of any shortfall of funds.
The RBI move means it's a back to back interest rateincrease. In its June policy meet, the rate-setting panel headed by Governor Urjit Patel raised repo rate by 25 basis points to 6.25 per cent. Back then, that was the first rate increase since Narendra Modi came to power in May 2014.
This is the first time since October 2013 that the rate has been increased at consecutive policy meetings.
The MPC kept its policy stance neutral at today's meet.
Reverse repo -- the rate at which the Reserve Bank borrows money from commercial banks within the country -- was adjusted to 6.25 per cent.
Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral Acharya and Urjit Patel voted in favour of the decision and Ravindra Dholakia voted against the decision. The minutes of the MPC’s meeting will be published by August 16, 2018. The next meeting of the MPC is scheduled from October 3 to 5, 2018.
Even as inflation projections for second quarter have been revised marginally downwards vis-à-vis the June statement, projections for the third quarter onwards remain broadly unchanged, the RBI said in a statement.
"Rising trade tensions may, however, have an adverse impact on India’s exports. Based on an overall assessment, GDP growth projection for 2018-19 is retained, as in the June statement, at 7.4 per cent, ranging 7.5-7.6 per cent in H1 and 7.3-7.4 per cent in H2, with risks evenly balanced; GDP growth for Q1:2019-20 is projected at 7.5 per cent," it added. With inflation turning sticky, the central bank was widely expected to tighten the monetary policy. Consumer prices hardened to 5 per cent in June, from 4.87 per cent in May. With this, the pace of retail inflation climbed for the third consecutive month. India's 10-year benchmark bond yield briefly rose to 7.84 per cent from 7.78 percent before the announcement, but retraced to pre-decision levels. 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. Headline inflation has been well above the 4 per cent target and core inflation -- minus food and fuel -- has remained stubborn. This, along with risks of higher raw material prices over the next few quarters, had made Kotak Institutional Equities anticipate a rate hike this time around. According to the brokerage house, MSP (minimum support price) hikes for kharif crops and the risk of a trickledown effect on food inflation, besides a falling rupee, added to its case. "Growth remains on a stronger footing, implying that the output gap is fast closing and can lead to inflationary pressures in medium term," said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities. The government’s spending is being watched, said Sumit Bilgaiyan, co-founder and Director at Equity99. "There are also some positive signs in the economy. Auto sales numbers are quite good from the last quarter, which are aided by better monsoon. This clearly indicates that rural areas are witnessing a strong recovery. Apart from domestic cues, the RBI is closely monitoring what is happening at the global level," the expert said. Meanwhile, economists have voiced their concern as the trade war rhetoric hots up again.
