The six-member monetary policy committee of the Reserve Bank of India (RBI) has unanimously decided to increase the key policy rate or the repo rate by 25 basis points to 6.25% as inflation outlook worsens due to a rise in crude oil prices.
This is the first rate hike by the central bank in almost four and a half years.
“A major upside risk to the baseline inflation path in the April resolution has materialised, viz. a 12% increase in the price of the Indian crude basket, which was sharper, earlier than expected and seems to be durable,” said the central bank.
“Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook — both on the upside and the downside.”
Consumer price-index-based inflation or retail inflation rose sharply to 4.6% in April. RBI projected CPI inflation at 4.6% in H1 and 4.7% in H2.
The central bank noted since the MPC’s last meeting in early April, the price of Indian basket of crude surged from $66 a barrel to $74.
“This, along with an increase in other global commodity prices and recent global financial market developments, has resulted in a firming up of input cost pressures,” it said.
RBI said inflation expectation is also on the rise as evident from the May 2018 round of the Reserve Bank’s survey of households which reported a significant rise in households’ inflation expectations of 90bps and 130bps, respectively, for three-month and one-year ahead horizons.
RBI has retained GDP growth for 2018-19 at 7.4% as projected in the April policy. GDP growth is projected in the range of 7.5-7.6% in H1 and 7.3-7.4% in H2, with risks evenly balanced, RBI said.