RBI NEUTRAL STANCE RAISES EYEBROWS

6-member MPC unanimously vote for 25 bps hike; CPI forecast revised to 4.9%

The 25 basis point hike in policy rates by the Reserve Bank of India on Wednesday came as a surprise for analysts, who cautioned to brace for more such moves in the future as the central bank has upped its inflation forecast.

With all its members voting for the increasing, the 6-member Monetary Policy Committee (MPC) surprised markets by raising the repo rate, at which it lends to other banks, to 6.25 per cent but kept its policy stance as "neutral".

The committee “felt that there was enough uncertainty for us to keep to the neutral stance and yet respond to the risks to (the) inflation target that have emerged in recent months,” RBI Governor Urjit Patel said.

The reverse repo rate, at which it borrows from banks, was also raised by similar proportion to 6 per cent.

This is the first increase in interest rate since January 28, 2014 when rates were hiked by a similar proportion to 8 per cent.

Icra Ratings' managing director and chief executive Naresh Takkar said the rate hike will push up bank lending rates, impacting their margins, and may also test the strength of the investment recovery in FY19.

"Based on the past narrative of RBI, we did not anticipate... with this hike,

RBI has already signalled a reversal on policy rates, and we believe one more may be in store during FY19," the rating agency said.

It attributed the hike to both domestic considerations which are causing an increase in inflation, as well as international ones like the US Fed's stance with respect to unwinding of its balance sheet and guidance on interest rates.

“With growth strengthening and core inflation picking up, we think Wednesday’s hike marks the start of a modest tightening cycle,” said Shilan Shah, the senior India economist at Capital Economics.

Domestic factors which will hurt inflation will include house rent allowance revision by state governments, surge in minimum support prices and also impact of the crude price hikes, it said.

The agency's rival Care Ratings said that it had anticipated for a status quo in rates at the policy announcement and added that it expects "at least" another 0.25 per cent hike in rates by December and possibly one more by March next year.