In line with market expectations, the Monetary Policy Committee headed by RBI Governor Urjit Patel has unanimously hiked the key policy repo rate by 25 basis points to 6.25 percent.

Consequently, the reverse repo rate under the liquidity adjustment facility stands adjusted to 6.0 percent. Repo rate is the rate at which RBI lends to banks generally against government securities while the reverse repo is the rate at which RBI borrows money from the banks. Accordingly, the Marginal Standing Facility rate and the Bank Rate too stand adjusted at 6.50 percent.

This is the first time since January 2014 that RBI has announced a rate hike. Since then, RBI has either reduced the rate or maintained status quo. In its second bi-monthly monetary policy review announced today, RBI has however maintained its neutral stance and said that today’s hike reiterates its commitment to achieving the medium-term target for headline inflation of 4 percent on a durable basis, while supporting growth.

While retaining the GDP growth outlook at 7.4 percent for FY19, RBI has however revised its inflation projection. It has said that that inflation is likely to rise to 4.8 -4.9 percent in first half of 2018-19 and 4.7 percent in the second half. RBI has said that sharp rise in petroleum product prices is likely to impact disposable incomes.

The statement says that volatile global financial markets and significant rise in CPI inflation excluding food and fuel pose upside risk for inflation adding that normal and well-distributed monsoon may help in keeping food inflation on the lower side. It adds that adherence to budgetary targets by the Centre and the states will also ease upside risks to the inflation outlook considerably.

The six member Monetary Policy Committee has noted that domestic economic activity is exhibiting sustained revival. Investment activity is also recovering and could receive a further boost from swift resolution of distressed sectors of the economy under the Insolvency and Bankruptcy Code. The next meeting of the Monetary Policy Committee is scheduled on 31st July and 1st August, 2018