The monetary policy committee of the Reserve Bank of India increased the repo rate by 25 basis points to 6.25%. The committee arrived at this decision because the outlook for inflation had become uncertain due to a surge in the international crude oil prices. The last hike in repo rate was four and a half years back in 2014.
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Banks may have anticipated this move as the ICICI Bank, State Bank of India and the Punjab National Bank had already raised their lending rates last week. However, they may not increase them immediately. The inflation projection by RBI shows a rise from 4.8% to 4.9% in the first half of the financial year and 4.7% in the second half. The Central Bank stated that there is a major upside risk to the baseline inflation path in April which has materialized. The Indian crude basket surged to $74 per barrel from $66 since April. It further stated that the crude oil prices are volatile which causes considerable uncertainty to the inflation outlook on the upside and the downside. The consumer price index based inflation rose to 4.6% in April from 4.28% in March.
Further, the central bank observed that inflation expectations were on the rise and this was evident from its survey of the households. The central bank has increased the inflation projection but it has maintained the ‘neutral’ stance in regard to monetary policy which means interest rates can move either way. RBI governor Urjit Patel stated that the committee felt that there was enough uncertainty for them to keep a neutral stance and respond to the risk of inflation target that has emerged lately.
The GDP growth outlook for 2018-19 has been maintained at 7.4% that was projected in the April policy. It is in the range of 7.5%-7.6% in the first half and 7.3%-7.4% in the second half. An increase in more rates is anticipated by market participants due to the further risks to inflation. The domestic price risks and strong global commodity prices could warrant further monetary action in the coming months.