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RBI monetary policy: Repo rate hiked by 25 bps

RBI monetary policy: Repo rate hiked by 25 bps

The influential think tank said: "The committee should emphasise the uncertainty (rather than the certainty) of its future policy stance in its communications and its willingness to reverse its decisions".

Mumbai: Home, auto and personal loans are set to get costlier as the Reserve Bank of India on Wednesday raised the repo rate, the rate at which it provides funds to banks, by 25 basis points, citing runaway inflation.

In June, the MPC had raised the key rate by a similar 25 basis points or 0.25 per cent. For the July-September quarter, RBI pegged CPI-based retail inflation at 4.2 per cent which it sees firming up further to 4.8 per cent in the second half of the current fiscal.

The Reserve Bank of India governor-headed MPC in a statement, issued after three-day meeting, said, "robust corporate earnings, especially of fast moving consumer goods (FMCG) companies, also reflect buoyant rural demand". The committee kept the policy stance neutral.

Ben Brettell, senior economist at Hargreaves Lansdown, commented: "The main argument for raising rates now is that it gives the Bank more room for manoeuvre when the next downturn hits".

In its report, DBS said that considering the challenges facing the economy due to the weak rupee and the rising oil prices, the RBI would consider hiking interest rates right.

On liquidity in the financial system, RBI deputy governor Viral Acharya in a media briefing after the central bank hiked the repo rate said: "Though the growth in currency-in-circulation has moderated to some extent recently, its expansion remains above the historical trend".

Kundu said he expects India to hike rates again before the fiscal year ends in March 2019.

"Household consumption is expected to grow at a modest rate, broadly in line with real incomes".

The central bank said inflation in two years' time was likely to be 2.09 percent, above the BoE's 2 percent target. Recent data appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter.

The pound fell 0.5% against the U.S. dollar and 0.2% versus the euro, despite the rate rise and unexpected unanimous backing of the MPC for the move. This warrants tighter policy for now, but the RBI has also warned against anticipating too much tightening until the effects of the hikes delivered so far this year are fully transmitted, with a lag of a few quarters, in the real economy.

"May would be my guess for the next hike", said Kallum Pickering, a United Kingdom economist at Berenberg.

Patel said that given such an external environment, the central bank has to run a tight ship on the risks it can control to maximise the chances of ensuring macro-economic stability and continuing with the growth profile of 7-7.5 per cent.

The statement noted that "fuel and light group" inflation rose sharply in the period since the previous policy review, pulled up by liquefied petroleum gas (LPG) and kerosene prices.

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