The Reserve Bank of India (RBI) on Wednesday raised its policy rate for the first time in over four years, due to inflation concerns, and it surprised some analysts by keeping its policy stance as “neutral”.The RBI’s monetary policy committee lifted the repo rate by 25 basis points to 6.25 percent. This is the first change since a 25 bps cut in August 2017.
The hike, the first since January 2014.The repo rate is the rate at which the RBI lends short-term money to the banks. The central bank has also increased the reverse repo rate — the rate at which the RBI borrows from commercial banks — to 6 per cent.The reverse repo rate was increased by 25 basis points to 6.00 percent.All six members on the policy panel voted for a rate hike.
The central bank will remain cautious and vigilant on managing the risks to growth and inflation, governor Urijit Patel told reporters.Deputy governor Viral Acharya said that RBI will use appropriate instruments to manage liquidity as the surplus is likely to dip later this month.
Capital Economics said it believes Wednesday’s decision “marks the start of a modest tightening cycle over the coming months”.
In a statement, the RBI said it “reiterates its commitment to achieving the medium-term target for headline inflation of 4 percent on a durable basis”.CPI Inflation forecast was revised marginally upwards by around 15 bps to 4.8% in FY19—with risks to the upside, although the positive point was that GDP growth forecast for FY19 was maintained at 7.4%, with risks evenly balanced.
Due to inflation concerns, some analysts had expected the RBI to switch its stance to “tighten” on Wednesday. Inflation worries have risen following a steep increase in global oil prices and a weakening rupee, plus a potential rise in consumer spending as India’s economy expanded at a robust 7.7 percent annual pace in January-March quarter.
The RBI on Wednesday also raised its inflation projection for the second-half of fiscal 2018-19 to 4.7 percent from an earlier projection of 4.4 percent.Annual consumer inflation was 4.58 percent in April, the sixth straight month it topped the RBI’s medium-term 4 percent target.
Dinabandhu Mahapatra, MD & CEO, Bank of India, said,“ The hike in the Benchmark Policy rate by RBI shows the RBI’s concern over spikes in retail inflation, especially food inflation, in recent months. More importantly, RBI has revised upwards its CPI forecast to 4.8-4.9% in first half and 4.7% in the second half of FY 2018-19. This indicates RBI will remain more vigilant on retail price levels in the coming months. On the growth side, RBI has retained GDP growth forecast for the current fiscal at 7.4% with risks evenly-balanced,''
Sampath Reddy,chief investment Officer, Bajaj Allianz Life Insurance,“With RBI keeping its policy stance unchanged at ‘neutral’, we feel that future rate action and policy stance will continue to be data dependent, and especially track the course of inflation & oil price trajectory, and global monetary policy events. We continue to prefer the shorter end of the yield curve at this juncture.”
Rajeev Radhakrishnan, Head – Fixed Income, SBI Mutual Fund said,“ Overall the pre emptive rate hike seems more in response to financial market stability concerns in the context of incremental portfolio outflows, rupee weakness, up move in crude prices as well as the policy rate actions by other EM central banks recently. At the same time, the neutral stance probably conveys a more measured approach in the future. The RBI stance also conveys a more confident tone with respect to sustainability of growth impulses, which needs to be validated by incremental broad based data points going forward”.
Sajal Gupta, head forex & rates, Edelweiss Securities commented,“We think that RBI is embarking on rate hike cycle ahead of the curve, given that economic recovery is still in early phase, low rural wage growth and corporate pricing power remains weak. We think CPI could rise further for coming months owing to low base but should ease in H2FY19. To that extent, we do not foresee another hike in August policy review.''
The 10-year benchmark bond yield rose 4 basis points to 7.87 percent after the monetary policy announcement while the rupee was at 66.97 to the dollar from 67.05 before the news.
The main stock market index pared gains after the central bank’s announcement.India’s central bank becomes the latest in Asia to increase rates recently, to battle inflationary pressures or support its currency.
India’s rate decision comes one week before a Fed policy meeting that’s widely expected to raise U.S. interest rates.