Mumbai: The Reserve Bank for the second time in two months today raised its benchmark interest rate by 25 basis points on inflationary concerns, a move that will make the home, auto and other loans expensive.
With five of its members voting for the increase, the 6-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel, increased repo rate, at which it lends to other banks, to 6.5% but kept its policy stance as “neutral”.
The reverse repo rate, at which it borrows from banks, was also raised by a similar proportion to 6.25%. The marginal standing facility (MSF) rate and the Bank Rate were also raised to 6.75%.
Following the rate hike, the BSE index Sensex slipped from record high to ends 84.96 points lower at 37,521.62.
Anticipating firming of interest rate, country’s largest lender SBI has raised fixed deposit rate by up to 0.1%. Other banks are also likely to firm up lending rates making loans costlier for borrowers.
RBI had last raised the repo rate on 6 June by 0.25% to 6.25%. That increase was the first since 28 January 2014 when rates were hiked by a similar proportion to 8%.
In the subsequent years, RBI cut interest rate on six occasions. In its last revision, on 2 August 2017, rates were cut by 25 basis points to 6%.
In the third bi-monthly monetary policy of the 2018-19, RBI today cited various concerns to inflation like volatile crude prices, uncertainty in the global financial market, hardening of input prices for corporates, uneven distribution of rainfall, fiscal slippages and rise in MSP of foodgrains.
“Against the above backdrop, the MPC decided to increase the policy repo rate by 25 basis points. The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis,” it said.
With regard to inflation, RBI said, it is projected at 4.6% in the second quarter, and 4.8% in the second half of 2018-19.
Based on an overall assessment, it said, GDP growth projection for 2018-19 is retained, as in the June statement, at 7.4%, ranging 7.5-7.6% in the first half and 7.3-7.4% in the second half, with risks evenly balanced.
Five members of MPC — Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral V Acharya and Urjit R Patel voted in favour of the decision while Ravindra H Dholakia voted against the decision.
The next meeting of the MPC is scheduled from 3 to 5 October 2018. The Reserve Bank today retained the GDP forecast for the current fiscal at 7.4% on robust corporate earnings and buoyant rural demand, though it flagged global trade tensions for Indian exports.
As per the RBI, the growth would be in the range of 7.5-7.6% in first half of the fiscal and 7.3-7.4% in October-March 2018-19 period “with risks evenly balanced”.
The central has also projected the GDP growth for the first quarter of the next financial year at 2019-20 at 7.5%.
The monetary policy statement further said that increased FDI flows in recent months and continued buoyant domestic capital market conditions bode well for investment activity.
The central bank said that activity in the manufacturing sector is expected to remain robust in Q2, though there may be some moderation in pace.
Rising trade tensions may, however, have an adverse impact on India’s exports.