Mumbai: The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) voted unanimously to hike the repo rate by 25 basis points and to keep its policy stance neutral, leaving the room open for further rate hikes.
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The rate hike decision was contrary to market expectation that the central bank will hold rates but may change its stance to hawkish from neutral. A poll by Mint had showed that only a quarter of the economists surveyed expected a rate hike.
Supporting the rate hike was the increase in the inflation forecast. The central bank has now forecasted average inflation for the fiscal year 2018-19 to be 4.8-4.9% in the first half and 4.7% in the second half. In the previous monetary policy meeting two months ago, RBI had predicted average inflation to be 4.7-5.1% for first half of the current fiscal and thereafter slow to 4.4% in the second half.
“Actual inflation outcomes since the April policy have evolved broadly on the lines of the projected trajectory. However, there has been an important compositional shift. While the summer momentum in vegetable prices was weaker than the usual pattern, there was an abrupt acceleration in CPI inflation excluding food and fuel,” the statement said.
Click here to read the full text of RBI’s monetary policy statement
Nevertheless, the policy statement flagged off several factors that could threaten to push up inflation. The volatility in crude oil prices and global financial markets, rise in domestic household inflation expectations, hardening of wages and input costs and the impact of implementation of house rental allowance by various state governments are some key upside risks, the statement said.
The MPC, however, warned that the impact of revision in minimum support prices is uncertain due to lack of adequate details.
As for India’s GDP growth, the rate-setting panel retained its growth forecast of 7.4% for 2018-19. GDP growth is likely to be 7.5-7.6% in the first half and 7.3-7.4% in the second half. The MPC sounded optimistic on investment and noted that consumption demand remains strong.
The decision was unanimous as all members of the monetary policy committee, including Ravindra Dholakia and Pami Dua, both of whom were known for their dovish stance, voted in favour for a rate hike.