The Reserve Bank of India (RBI) on Wednesday raised the benchmark lending rate by 0.25% for the second time in two months. The repo rate, at which the central bank lends to other banks, now stands at 6.5 per cent. Such a hike is usually followed by a rise in home loan rates.
It is the first time since October 2013 that the RBI has hiked interest rate at consecutive policy meetings. Despite the rate hike, the six member Monetary Policy Committee (MPC) maintained a neutral stance, which will give the central bank flexibility to move either way, depending on the inflation trajectory.
5 Key takeaways
- GDP growth: The RBI retained its GDP growth projection for 2018-19 at 7.4%, ranging 7.5-7.6% in the first half of the fiscal year and 7.3-7.4% in the second half. Risks to growth are “evenly balanced”, the central bank said. The progress of the monsoon so far and a sharper than the usual increase in MSPs of kharif crops are expected to boost rural demand by raising farmers’ income. Robust corporate earnings, especially of fast moving consumer goods (FMCG) companies, also reflect buoyant rural demand, the RBI said. However, the MPC warned that “rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity”.
- Inflation outlook: The MPC said retail inflation will be 4.8% for the second half of current fiscal, higher than the 4.7% rate it had projected earlier. Retail inflation has been projected to rise further to 5 per cent in the first quarter of the next fiscal year, 2019-20. The inflation outlook is likely to be shaped by several factors, including the recent hike in minimum support prices for kharif crops and global crude prices.
- Neutral stance: Explaining the central bank’s neutral stance, despite two rate hikes in two months, RBI governor Urjit Patel said the inflation risks were “evenly balanced”. There was a fair bit of uncertainty around the consumer inflation number going forward and therefore it was important to keep options open, he said. On the interest rate hike, Patel said, inflation had remained above the target of 4% for several months and the RBI’s target was to maintain the 4% inflation target on a “durable basis”.
- GST rate cut impact: The central government has reduced the goods and services tax (GST) rates on several goods and services. This will have some direct moderating impact on inflation, provided there is a pass-through of reduced GST rates to retail consumers,” RBI said.
- MSP hike impact: RBI deputy governor Viral Acharya said the RBI had built in some of the impact of the MSP hikes in its inflation projections, but there remained “considerable uncertainty” over how the MSP hike would play out on inflation. The MSP hike was also likely exert pressure on rural wages, he said. “Such an increase operates through multiple channels as there is a direct impact on the targeted food items. There could be impact on rural wages and then there could be generalization of all this through inflation expectations.”
The MPC added that the volatility in global financial markets continues to impart uncertainty to the inflation outlook.
The governor said that the increased FDI flows in recent months have continued buoyant domestic capital market conditions well for investment activity.
The MPC will hold its next meeting during the festive season from October 3 to 5, 2018.
(with ANI inputs)