RBI hikes interest rate on inflation concerns

[] The Reserve Bank of India has raised the repo rate for the first time in over four years by 0.25 per cent, citing inflation concerns

The Reserve Bank of India (RBI), on June 6, 2018, for the first time in four-and-half-years, raised the key interest rate by 25 basis points to 6.25 per cent, on inflation concerns arising from the surge in international oil prices, in a move that will translate into higher EMIs for home, auto and other loans. In its second bi-monthly monetary policy for the current fiscal, the central bank revised upwards the retail inflation range to 4.8-4.9 per cent in the first half of 2018-19 and 4.7 per cent in the second half.

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It includes the impact from HRA for central government employees, with risks tilted to the upside. With all the six members voting for an increase in policy rates, the Monetary Policy Committee raised  the repo rate, at which it lends to other banks, by 25 basis points and kept the stance neutral, the RBI said in a statement. The reverse repo rate, at which it borrows from banks, was also raised by similar proportion to 6 per cent. Excluding the impact of HRA revisions, CPI-based inflation is projected at 4.6 per cent in first half of 2018-19 and 4.7 per cent in H2, the RBI said.

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This is the first increase in interest rate since January 28, 2014 when rates were hiked by a similar proportion to eight per cent. In the subsequent years, the RBI cut interest rate on six occasions. In its last revision, on August 2, 2017, rates were cut by 25 basis points to six per cent.

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RBI retained the GDP growth for the financial year 2018-19 at 7.4 per cent. “The resulting pick-up in the momentum of inflation, excluding food, fuel and HRA, has imparted persistence into higher CPI (Consumer Price Index) projections for 2018-19,” the RBI said in the policy. “Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook – both on the upside and the downside,” it said. In the April policy, the RBI had projected CPI inflation for 2018-19 to be at 4.7-5.1 per cent in H1 and 4.4 per cent in H2, which included the HR impact for central government employees.

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The RBI governor, Urjit Patel, said the MPC reiterates its commitment to achieving the medium-term target for headline inflation of four per cent on a durable basis. The decision of the MPC is consistent with the neutral stance of monetary policy, in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of four per cent within a band of +/- two per cent, while supporting growth, he added. Headline inflation has been sharper than anticipated and it remained above the four per cent target in the last six months, with RBI maintaining status quo during the period.

The domestic economic activity has exhibited sustained revival in recent quarters and the output gap has almost closed, Patel said. Investment activity, in particular, is recovering well and could receive a further boost from swift resolution of distressed sectors of the economy, under the Insolvency and Bankruptcy Code, he added. However, he said: “Geo-political risks, global financial market volatility and the threat of trade protectionism pose headwinds to the domestic recovery.”

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Category: Lifestyle

Debora Berti

Università degli Studi di Firenze, IT

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