Reserve Bank of India hikes repo rate by 25 basis points to 6.25%. TheRBI has finally raised rates after about 4.5 years as crude prices surges. The six-member Monetary Policy Committee (MPC) of the central bank on Wednesday increased the repo rate by 25 basis points to 6.25%. It’s first during Narendra Modi’s four-year tenure as Prime Minister.
The Monetary Policy Committee arrived at the unanimous decision as the outlook for inflation fear and emboldened by growth following a surge in international crude oil prices.
Whereas economic growth makes each and every government happy, it resulted in the sudden rise in price, especially ahead of elections.
Various banks may have expected the Reserve Bank of India’s move. This is because of major lenders such as the State Bank of India, Punjab National Bank or ICICI Bank had raised their interest rates on home loans last week. Whereas the other banks who have already raised their interest rates may not increase them as of now.
Reserve Bank of India officials said, “Crude oil prices have been volatile and this imparts considerable uncertainty to the inflation outlook both on the upside and the downside.”
The RBI has increased its inflation rate from 4.8% to 4.9% in the first half of the financial year and 4.7% in the second half of the financial year. While the rate hike will lower the value of banks’ bond portfolios. As per the Central Bank’s report, “A major upside risk to the baseline inflation path in the April resolution has materialised, i.e., 12% increase in the price of Indian crude oil imports, which was sharper, earlier than expected and seems to be durable. The Indian crude basket surged to $74 a barrel from $66 since the last monetary policy meeting in April.”
Madan Sabnavis, CARE’s chief economist said,”The upside risk to the inflation emanates from the rising crude oil prices globally along with minimum support price impact.” He further added that the RBI is expecting to raise one more interest rate by at least 25 basis points during this financial year itself.
Present RBI Governor, Urjit Patel said, “It is not conflicting at all. A neutral stance leaves all options open and other central banks also do the same.”
The RBI has also studied that the inflation expectations were on the rise, evident from its survey of households.
Whereas, Abheek Barua, chief economist of HDFC Bank said,”This is not likely to be an end of the hiking cycle as domestic price risks such as MSP hikes and firm global commodity prices would warrant further monetary action.”