NEW DELHI: The six-member monetary policy committee of RBI headed by Governor Urjit Patel on Wednesday bit the bullet and hiked the repo – the short-term lending rate – by 25 basis points to 6.25 per cent.
This was the first rate hike by the Indian central bank in four-and-a -half years, since the BJP-led National Democratic Alliance government was vo ted into office in May 2014. The reverse repo rate has been adjusted to 6 per cent.
The RBI allowed 2 per cent more SLR (statutory liquidity ratio) carve out to meet liquidity coverage ratio. The banks can now use SLR carve out of 13 per cent to meet liquidity cover ratio.
The MPC kept its policy stance to ‘neutral’. Eighty-three per cent of the economists who participated in an ETNow poll had expected a 'hawkish' stance while the remaining 17 per cent expected a 'neutral’ view.
It was MPC’s second bimonthly policy review of this financial year.
The GDP growth for 2018-19 is retained at 7.4 per cent as in the April policy. GDP growth is projected in the range of 7.5-7.6 per cent in H1 and 7.3-7.4 per cent in H2, with risks evenly balanced. "The MPC notes that domestic economic activity has exhibited sustained revival in recent quarters and the output gap has almost closed. Investment activity, in particular, is recovering well and could receive a further boost from swift resolution of distressed sectors of the economy under the Insolvency and Bankruptcy Code," RBI said.
Geo-political risks, global financial market volatility and the threat of trade protectionism pose headwinds to the domestic recovery. It is important that public finances do not crowd out private sector investment activity at this crucial juncture. Adherence to budgetary targets by the Centre and the States – which appears to be the case thus far – will also ease upside risks to the inflation outlook considerably, the MPC statement read.
Money markets were expecting rates to rise. At Tuesday’s close, the 12-month Overnight Indexed Swap (OIS) rate, an indicator of future rate action, remained elevated at a more than two-year high.
The rate hike is expected to trigger a spike in bond yields, thus raising further inflation risks.
This is the first time the MPC met for three days, instead of the usual two, citing certain ‘administrative exigencies’.
The RBI statement said MPC members unanimously favoured a rate hike . Two members had voted for a 25-basis points hike at the April rate review.
Much water has flowed below the bridge since. A recent spike in crude prices has upset inflation calculations. RBI had pegged the same at $68 a barrel in its April projections but the prices crossed $80 in May, creating a hole in the country’s current account and threatening to stoke consumer prices further. Crude futures traded at $75 on Wednesday, amid uncertainty over Venezuela output and Nigerian outages.
India’s Consumer Price Index, the retail price gauge, was at 4.58 per cent in April, up from 4.28 per cent a month earlier. RBI’s retail inflation target for the April-September period of FY19 stands at 4.7-5.1 per cent.
Foreign brokerage UBS had assigned 40 per cent probability of a pre-emptive 25 basis point hike this time around.
Indonesia, which has a large population and runs a high current account deficit (CAD), just like India, hiked interest rates twice in the last one month. Turkey too raised interest rates by a massive 300 basis points last week.
With pricey oil, India’s high consolidated gross fiscal deficit and CAD to GDP ratios could make it vulnerable to the negative sentiment seen in other emerging markets. India's low external debt to GDP ratio and high import cover may act as a buffer.
No comments:
Post a Comment