The Reserve Bank of India on Wednesday hiked repo rate by 25 basis points to rein in inflation pressures that could arise from volatile crude oil prices, a revision in the minimum support price of kharif crops, and hardening input costs reported by manufacturing and services firms.

Members of the Monetary Policy Committee (MPC) voted 5-1 in favour of a hike.

This is the second straight 25-bps hike in the repo rate even as the central bank persisted with its neutral policy stance. In June 2018, the MPC had unanimously voted to increase the rate.

With the latest increase, which market experts see as a ‘front-loading’ of the rate hike cycle, the repo rate stands at 6.50 per cent against 6.25 per cent earlier. One basis point (bp) equals one-hundredth of a percentage point.

Banks are now expected to further nudge up their deposit and lending rates.

RBI Governor Urjit Patel said: “On the domestic front, the MPC took note of the rise in retail or CPI (consumer price index) inflation for the third consecutive month in June. Even though food inflation remained muted, other components recorded moderate to sharp price increases.” He observed that the uncertainty around domestic inflation needed to be carefully monitored in the coming months.

Global risks

Rising trade protectionism, geo-political tension and elevated oil prices pose a grave risk to near- and long-term global growth prospects by adversely impacting investment, disrupting global supply-chains and hampering productivity, he added.

On why the RBI has persisted with a neutral stance, Patel said: “Many of the risks that we have cited, which informed our projections, are on both sides...there is a fair bit of uncertainty around the CPI prints going forward and therefore it was important that we kept our options open.”

Viral Acharya, Deputy Governor, said the effects of the two consecutive rate hikes would play out only in due course as the transmission operates with a lag and it would take some time to bite on the inflation front.

Rajnish Kumar, Chairman, State Bank of India, said the RBI’s decision reflects a desire to front-load the rate-hike cycle. The decision to retain its neutral stance points to a willingness to be flexible given the global growth uncertainties.

On the RBI’s preparedness to deal with geopolitical risks and trade wars, Patel said: “We have already had a few months of turbulence behind us and it looks like this is likely to continue (but for how long, I don’t know).”

“Trade skirmishes evolved into tariff wars and now we are possibly at the beginning of currency wars. Given this, we have to ensure that we run a tight ship on the risks that we control to maximise the chances of ensuring macroeconomic stability and continuing with the growth profile of 7-7.5 per cent going forward.”

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