RBI hikes repo rate by 25 bps

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The Reserve Bank of India’s (RBI) much-anticipated monetary policy is out.

This time, RBI’s monetary policy committee (MPC) has decided to increase the key repo rate -the rate at which the central bank infuses liquidity in the banking system—by 25 basis points to 6.25 per cent.

Worth noting is, all the six members of the rate-setting committee have voted for a 25 bps increase in the rate.

This year, the MPC led by RBI governor Urijit Patel observed 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.

However, going forward the central bank will remain cautious and vigilant on managing the risks to growth and inflation, said Governor Urijit Patel.

Deputy Governor Viral Acharya said that RBI will use appropriate instruments to manage liquidity as the surplus is likely to dip later this month.

Terming the RBI decision to hike rates ‘a step in the right direction’, VK Sharma, Head Private Client Group & Capital Market Strategy at HDFC Securities, said: The RBI decision to hike rates shows that the MPC is hawkish on inflation but we like the confidence shown in the economic growth. Despite inflationary pressures, RBI has stuck to its growth projections and guided for robust investment activities for FY19. Despite the hike, the stance is still neutral, which is good.  This puts RBI ahead of the curve.”

The central bank retained the GDP growth for 2018-19 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 first half, and 7.3-7.4 per cent in second half. “Consumption, both rural and urban, remains healthy and is expected to strengthen further. Geo-political risks, financial market volatility, trade protectionism to impact domestic growth,” said RBI in the statement.

With regards to inflation forecast for 2018-19, MPC revised CPI inflation for 2018-19 to 4.8-4.9 per cent in the first half and 4.7 per cent in the second half, including the HRA impact.

“While the summer momentum in vegetable prices was weaker than the usual pattern, there was an abrupt acceleration in CPI inflation excluding food and fuel,” noted the Central Bank, adding that recent rally on oil prices has also weighed on.

Further, the much-anticipated policy statement flagged off several factors that in coming times could threaten to push up inflation. The volatility in crude oil prices and global financial markets, rise in domestic household inflation expectations, hardening of wages and input costs and the impact of implementation of house rental allowance by various state governments are some key upside risks, the statement observed.

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