Money & Banking

Monetary Policy: RBI raises repo rate by 25 bps

Our Bureau | Updated on June 06, 2018

The six-member committee voted unanimously in favour of the decision. 

All 6 members of the MPC voted in favour of the decision

The RBI’s Monetary Policy Committee (MPC) chose to hike its key policy rate, the repo rate, by 25 basis points to 6.25 per cent, in its second bi-monthly meeting for the fiscal. This was its first hike in four-and-half-years.  The policy stance has however been retained as neutral.

The six-member committee voted unanimously in favour of the decision.  Dr Chetan Ghate, Dr Pami Dua, Dr. Ravindra H. Dholakia, Dr Viral V. Acharya, Dr Michael Patra and Dr. Urjit R. Patel voted in favour of the monetary policy decision.

The decision comes against the backdrop of rising inflation as well as improving growth numbers in the recent past. The Consumer price index ( CPI) had risen to 4.58 per cent in April.  Although this is still within the band of tolerance, there remains the possibility of it moving up further in the months ahead due to higher crude prices, higher minimum support prices to be announced.

The Sensex ended higher by 276 points or 0.79 per cent at 35,178.88.
 

Inflation

The RBI's MPC has  kept its inflation projections to between 4.8 and 4.9 per cent in the first half, which is in line with what it projected earlier.  It noted that since the MPC's meeting in early April, the price of Indian basket of crude surged from $66 a barrel to $74.  Alongside the increase in global commodity prices, recent global financial market developments have resulted in a firming up of input cost pressures, which is also confirmed in the RBI's surveys for manufacturing firms, the statement from MPC noted. 

The MPC said that the GDP growth rate for 2018-19 is retained at 7.4 per cent.

Oil price impact, other risks

The MPC of the RBI noted that a major upside risk to the baseline inflation path in its April resolution has materialised, that is, 12 per cent increase in the price of Indian crude basket, which was sharper, earlier than expected and seems to be durable.

The MPC catalogued the several other remaining risks.

It said, "First, global financial market developments have emerged as another important source of uncertainty. Second, the significant rise in households’ inflation expectations as gathered in the May 2018 round of the Reserve Bank’s survey could feed into wages and input costs in the coming months. However,the pass-through to output prices remains muted now. Third, the staggered impact of HRA revisions by various state governments may push headline inflation up. While the statistical impact of HRA revisions will be looked through, there is a need to watch out for any second round impact on inflation. Fourth, the impact of the revision in the MSP formula for kharif crops is not possible to assess at this stage in the absence of adequate details. Fifth, as forecast by the IMD, if the monsoon is normal and well-distributed temporally and spatially, it may help keep food inflation benign. "

The MPC noted 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.

Geo-political risks, global financial market volatility and the threat of trade protectionism pose headwinds to the domestic recovery, the MPC said.

In a veiled warning on the need to keep to the fiscal discipline, the MPC said, "It is important that public finances do not crowd out private sector investment activity at this crucial juncture. Adherence to budgetary targets by the Centre and the States– which appears to be the case thus far – will also ease upside risks to the inflation outlook considerably."

Click here for second bi-monthly monetary policy statement, 2018-19 [PDF}

Published on June 06, 2018

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