RBI hikes repo rate by 25 bps

All six monetary policy committee (MPC) members voted in favour of the repo rate hike.

The Reserve Bank of India (RBI), on Wednesday, hiked the key lending or repo rate by 25 basis points to 6.25 per cent.
 
Consequently, the reverse repo rate stands adjusted to 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent.
 
In its second bi-monthly monetary policy statement for 2018-19, the central bank said, "The decision of the MPC (Monetary Policy Committee) is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth."
 
All six monetary policy committee (MPC) members voted in favour of the repo rate hike.
 
The policy statement observed, "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. 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 central bank estimated GDP growth rate of 6.7 per cent for 2017-18 and 7.4 per cent for the current fiscal year. GDP growth is projected in the range of 7.5-7.6 per cent in H1 of 2018-19 and 7.3-7.4 per cent in H2, with risks evenly balanced
 
RBI's decision to hike repo rate was guided by a sharp spike in retail inflation which rose sharply to 4.6 per cent in April.
 
The RBI kept the retail inflation in the range of 4.7-5.1 per cent in the first half of 2019 and 4.4 per cent in the second half of the fiscal.
 
RBI's decision was surprising because most experts were expecting it to take a hawkish stance in the June policy review and to go for a rate hike only in August.
 
In the January-March quarter, the economic growth or gross domestic product (GDP) accelerated to 7.7 per cent, which is a near 2-year high.
 
Retail inflation rose to 4.58 per cent, after easing for three straight months while wholesale inflation rose to 3.18 per cent in April. This was the sixth straight month in which retail inflation level was higher than the RBI's medium-term target of 4 per cent.

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