IMF welcomes RBI decision to hike interest rates

The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Wednesday increased the repo rate by 25 basis points to 6.25%

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Washington: While experts and the stock market back home gave thumbs up to hike in the interest rate by the RBI, the International Monetary Fund (IMF) today also welcomed the decision of the Reserve Bank of India (RBI) to increase the repo rate by 25 basis point to 6.25%.

“We welcome the Reserve Bank of India’s decision to increase the policy rate by 25 basis points,” IMF Spokesman Gerry Rice told reporters during his bi-weekly news conference here.

In the context of rising inflation and additional upside risks to the forecasts due to higher oil prices, exchange rate depreciation and other domestic factors, the IMF thinks that this was an appropriate step by the RBI on Wednesday, Rice said. He was responding to a question on the decision of the RBI to increase the interest rate for the first time in the last four years.

The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Wednesday increased the repo rate by 25 basis points to 6.25%. The MPC arrived at the unanimous decision as the outlook for inflation had become ‘uncertain’ following a surge in international crude oil prices. This is the first rate hike in four-and-a-half years; the last was in January 2014.

The RBI increased its inflation projection to 4.8%-4.9% in the first half (H1) of the financial year and 4.7% in the second half, as compared with 4.7-5.1% in H1 and 4.4% for H2. “A major upside risk to the baseline inflation path in the April resolution has materialised, viz., 12% increase in the price of Indian crude basket, which was sharper, earlier than expected and seems to be durable,” the central bank said, adding that the Indian crude basket surged to $74 a barrel from $66 since the last policy meeting in April.

“Crude oil prices have been volatile and this imparts considerable uncertainty to the inflation outlook — both on the upside and the downside,” RBI said.

Consumer price index-based inflation, or retail inflation, rose to 4.6% in April from 4.28% in March. The central bank also observed that inflation expectations were on the rise, evident from its survey of households.

While the central bank has increased the inflation projection, it has maintained the ‘neutral’ stance for monetary policy, meaning interest rates can move either way.

The outlook for GDP growth for 2018-19 has been retained at 7.4% as projected in the April policy. GDP growth is projected to be in the range of 7.5-7.6% in H1 and 7.3-7.4% in H2, with risks evenly balanced, the RBI said.