Inflation fears led to RBI rate hike
Risk of inflationary pressures, triggered by rising crude oil prices, drove five members of the Monetary Policy Committee (MPC) in its August review to favour a hike in policy rate for the second time in a row. While external member Ravindra Dholakia favoured a status quo, all six members voted for the policy stance to remain neutral.
Risk of inflationary pressures, triggered by rising crude oil prices, drove the five members of the monetary policy committee (MPC) in its August review to favour a hike in policy rate for the second time in a row.
While external member Ravindra Dholakia favoured a status quo, all six members voted for the policy stance to remain neutral.
The MPC members raised concerns about the risk to the inflation target due to the impact from minimum support price (MSP) rise for crops, elevated crude prices and other factors such as increase in house rent allowance and monsoon conditions. Positive growth outlook and indications of output gap closing were also key factors for the rate hike vote.
Following the rate hike of 25 basis points, which was anticipated by many in the market, the policy repo rate stands at 6.5 per cent.
RBI governor Urjit Patel said the hike was "a necessary step towards securing the mandated 4 per cent inflation target on a durable basis" as inflation risks have continued to be elevated. He said CPI, excluding HRA, rose for the third consecutive month in June 2018, driven by a broadbased increase in inflation in non-food goods and services.
Pami Dua, another external member on the MPC and director of the Delhi School of Economics, cited the hardening of actual inflation, rising inflation expectations, along with prevailing upside risks to inflation as reasons for hike.
Viral Acharya, deputy governor said the upside risks are higher than downside risk as real-time indicators indicate growth recovery to be sustainable. He said, "The underlying inflation as reflected, especially in petrol and diesel, transportation (including fares), education fees, health services and clothing persists, and does not augur well for headline inflation going forward."
Acharya said that the hike would "help rein in demand pressures and manage inflation expectations".
Michael B Patra, executive director, RBI, said that the second hike would work its way through the economy, while vigil is kept on the expected rising path of inflation going forward. "The softer inflation prints expected in Q2 could likely lull inflation expectations, but abundant precaution and decisiveness in quelling risks to the target is warranted if the hard-earned gains in terms of macroeconomic stability and credibility have to be preserved," he added.
Dholakia said that the monthly headline inflation prints for May and June have turned out to be lower than RBI expectations.