RBI increases repo rate for the first time in Modi government
New Delhi : RBI’s six-member monetary policy committee headed by Governor Urjit Patel hiked the repo, the short-term lending rate by 25 basis points to 6.25 per cent.
It’s the first time in four-and-a -half years that the Indian Central Bank has made an rate hike, since the BJP-led National Democratic Alliance government was voted into office in May 2014. The reverse repo rate has been adjusted to 6 per cent.
The MPC kept its policy stand to ‘neutral’. 83 per cent of the economists who participated in an ‘ETNow poll’ had expected a 'hawkish' stance while the remaining 17 per cent expected a 'neutral’ view.
The GDP growth for 2018-19 is retained at 7.4 per cent as in the April policy. GDP growth is projected in the range of 7.5-7.6 per cent in H1 and 7.3-7.4 per cent in H2, with risks evenly balanced.
It was MPC’s second bimonthly policy review of this financial year.
The RBI allowed 2 per cent more SLR (statutory liquidity ratio) to meet liquidity coverage ratio. The banks can now uses SLR carve out of 13 per cent to meet liquidity cover ratio.
"The MPC notes that domestic economic activity has exhibited sustained revival in recent quarters and the output gap has almost closed. 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," RBI said.
Critics believe that it is important that public finances do not crowd out private sector investment activity at this crucial juncture. Faithfulness to budgetary targets by the Centre and the States appears to be the case thus far will also ease advantage risks to the inflation outlook considerably, the MPC statement read.
Money markets were expecting rates to rise. On Tuesday’s close, the 12-month Overnight Indexed Swap (OIS) rate, an indicator of future rate action, remained elevated at a more than two-year high.
This is the first time the MPC met for three days, instead of the two days, citing certain ‘administrative exigencies’.
The RBI statement said MPC members unanimously favoured a rate hike . Two members had voted for a 25-basis points hike at the April rate review.
A recent spike in crude prices has upset inflation calculations. RBI had hooked the same at $68 a barrel in its April projections but the prices crossed $80 in May, creating a hole in the country’s current account and threatening to stoke consumer prices further. Crude futures traded at $75 on Wednesday, in the middle of uncertainty over Venezuela output and Nigerian outages.
India’s Consumer Price Index, the retail price gauge, was at 4.58 per cent in April, up from 4.28 per cent a month earlier. RBI’s retail inflation target for the April-September period of FY19 stands at 4.7-5.1 per cent.
Foreign brokerage UBS had assigned 40 per cent probability of a pre-emptive 25 basis point hike this time around.
With costly oil, India’s high consolidated gross fiscal deficit and CAD to GDP ratios could make it susceptible to the negative sentiment seen in other rising markets. India's low external debt to GDP ratio and high import cover may act as a buffer.
