In line with equity and financial markets expectations, the Reserve Bank of India’s six-member monetary policy committee on Wednesday increased its policy repurchasing or repo rate (at which it lends short-term loans to commercial banks) by 25 basis points or 0.25 per cent from 6.25 per cent to 6.50 per cent.
This is the second successive rate hike by the central bank in as many policy pronouncements.
RBI Governor Urjit Patel justified the increase in policy rate citing upside risk to consumer price index-linked inflation (CPI) on account of the recent announcement by the government to increase minimum support prices or MSP for a range of foodgrain produce and continuing volatility in the global crude oil prices.
The Governor said despite global growth being on track and increasing along with economic activity, threat of trade war looms and raises a spectre of uncertainty.
However, the MPC while maintaining “neutral” policy stance also played down ~ or took a more pragmatic view ~ of likely upside risk to CPI-inflation.
The MPC, Patel said, based on its assessment of current scenario and how the MSP hike plays out in coming months has projected CPI at 4.6 per cent for Q2 ( July-September) and 4.8 per cent for second half of FY 2018-19. This may increase to 5 per cent in Q1 ( April-June) of 2019-20 with risk evenly balanced.
The second increase in policy rate will make consumer buying of new vehicles, homes as well as appliances costlier. Bankers are likely to pass on the burden of cost of funds to borrowers.
Banks, analysts say, are already struggling to increase or boost credit take-off to make their loan books more credible but the 0.25 per cent increase in repo rate will make their task more daunting.
They expect banks to announce hike in interest rates on loans in the coming week or so.