RBI hikes key policy rate by 25bps again
RBI hikes rate to 6.5% to rein in inflationary pressures
MUMBAI: The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) raised its benchmark rate for the second time in two months on Wednesday, likely making housing, automobile and personal loans more expensive and increasing the equated monthly instalments consumers pay for such credit.
RBI increased its key lending rate to 6.5%, the highest in two yeas, from 6.25% in an attempt to rein in inflationary pressures stemming from the government’s July 4 decision to raise the minimum support prices (MSPs) for 14 kharif (monsoon-sown) crops in an attempt to address farmers’ distress and quieten ensuing protests. In June , the RBI raised the rate for the first time in two years, to 6.25% from 6%.
On Wednesday, RBI maintained a “neutral” stance towards monetary policy, meaning that it sees no reason to either stimulate or to slow economic growth.
RBI increased the rate at which it lends money to commercial banks. In turn, commercial banks typically raise the rates at which they extend loans to borrowers. For consumers, that would translate into higher cost of home, car and personal loans at higher EMIs,
“This increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second round effects on headline inflation,” said RBI in its policy statement.
The RBI rate hike also highlighted its concerns over crude oil prices, which remain elevated despite a slight moderation. Global crude oil prices have surged nearly 20% this year and crossed $80 a barrel in May, their highest since 2014. The rupee is down nearly 7% against the dollar so far this year, making it the worst performer in Asia.
The Narendra Modi government set the MSPs for each of the 14 crops at a minimum of 1.5 times the cost of cultivation. The higher support prices—the biggest increase in the present government’s tenure—are likely to increase government expenses by ₹15,000 crore. The MSP for ricewas increased by ₹200 in absolute terms, which constitutes a 50% raise over input costs of ₹1,166.
The rate increase had been widely expected. Of the 15 economists surveyed by Mint, 12 had expected RBI to raise its key lending rate . Three economists had expected RBI to keep the rate unchanged at 6.25%.
RBI raised the average inflation projection for the second half of the year to 4.8% from a forecast of 4.7% in June. The central bank expects inflation to edge higher to 5% in the first quarter of the next fiscal year.
“We were expecting rate hikes to happen, and the Reserve Bank of India seems to have taken a positive view on the growth momentum. I think the rate hike decision is fairly justified based on the assessment of various factors which influence inflation,” said Dhananjay Sinha, head of institional research at Emkay Global Financial Services Ltd in Mumbai. “The increase in commodity prices, the rupee depreciation, higher rural spending would all affect inflation.”
Inflation has been accelerating sharply this year, reaching 5% in June, on the back of a weak rupee and higher oil prices. The RBI has a mandate to keep it at the 4% midpoint of its target band.
“The main reason for changing the policy rate is to ensure on a durable basis that we come to and maintain the 4 % target,” RBI governor Urjit Patel said, referring to the medium-term inflation goal. “We have been away from” that target for several months now and back-to-back hikes were to “maximize our chances that we don’t drift away,” he said.
RBI, however, remains sanguine about the performance of the monsoon which augurs well for food inflation to ease in the medium-term. And it retained its forecast of 7.4% for economic growth.
“The progress of the monsoon so far and a sharper than the usual increase in minimum support prices of kharif crops are expected to boost rural demand by raising farmers’ income. Robust corporate earnings, especially of fast moving consumer goods (FMCG) companies, also reflect buoyant rural demand,” the RBI said in a statement.
The decision was not unanimous unlike in the June policy. Five out of six MPC members voted in favour of a rate hike with Ravindra Dholakia voting against the increase.