Mumbai: The Reserve bank of India’s (RBI’s) monetary policy committee (MPC) on Wednesday raised repo rates by 25 basis points to 6.5% on account of inflationary pressures arising due to hike in minimum support price (MSP). The six-member committee voted to keep its policy stance neutral, thus keeping the door open for future rate hikes. A majority of economists surveyed by Mint was expecting a second consecutive rate hike in today’s monetary policy.
One basis point is one-hundredth of a percentage point.
RBI also raised the average inflation projection for the second half of the year to 4.8% from 4.7% in June. The central bank expects inflation to edge higher to 5% in the first quarter of next fiscal year.
The monetary policy statement also cited the implementation of the MSP hike as the primary factor stoking inflation this year. The government has fixed the MSP at 150% of the cost of production of all kharif crops.
“This increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second round effects on headline inflation,” said RBI in its policy statement. The RBI rate hike also highlighted its concerns over crude oil prices as it remains elevated despite seeing a slight moderation.
The central bank, however, remains sanguine about the overall performance of monsoon as it augurs well for food inflation in the medium-term.
On growth outlook, RBI remains confident of a strong economic activity supported by monsoon, strong rural demand due to MSP hike and rising investment activity.
“The MPC notes that domestic economic activity has continued to sustain momentum and the output gap has virtually closed,” said the policy statement.
The MPC also cited uncertainty around domestic inflation and recent global developments as concerns going forward.
“Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity,” said the statement.
The decision of the MPC was not unanimous unlike the previous policy. Five out of six MPC members voted in favour of a rate hike with Ravindra Dholakia voting against the decision.