RBI hikes repo rate again

The Reserve Bank of India’s (RBI) monetary policy committee on Wednesday decided to hike the repo rate, that is the rate at which it lends to banks by 25 basis points to 6.5 per cent. This is the second consecutive time the committee has raised the repo rate in an effort to contain early warning signs of inflation. The Bank’s six-member monetary policy committee which meets bi-monthly voted 5-1 in favour of the rate rise, unlike the previous time’s unanimous decision Ravindra Dholakia voted against the hike.

The RBI also adjusted its inflation projections for the second-half of 2018-19 to 4.8 percent, from the 4.7 percent it had predicted in its June meeting. The RBI Governor, Urjit Patel, said that consumer inflation had been above four percent for some time and the RBI wanted to maintain the inflation target of four per cent on a durable basis, explaining its decision to increase interest rates.

While the increase in Minimum Support Prices for several crops will have some upward impact on inflation, it is also likely to boost rural consumer demand which would have been strong anyway due to a good monsoon. However, coupled with the reduction in GST rates on several consumer durables items, the RBI believed would have an moderating impact on inflationary pressure in the benefits were passed through to consumers. However, the committee did warn of some headwinds facing the Indian economy going forwards including the rise in global oil prices and the potential risks to India from US President Donald Trump’s trade war. However, indicators from the auto industry in India also released today showed that sales of all vehicles remain fairly robust and many Indian companies have declared highly profitable first quarter results showing the economy is in good health.

Avnish Jain, Head, Fixed Income, Canara Robeco Mutual Fund said, “The Monetary Policy Committee  noted that the growth continued to be robust with high frequency indicators like tractor, two-wheeler sales and passenger vehicle demand showing good growth, while there was also increase in cement and steel consumption. Inflation showed an uptick on back of increase in core inflation and fuel though food inflation remains muted. While a good monsoons and cut in GST rates, if passed to consumers, are likely to dampen food inflation, MSP increase in likely to add to consumer inflation. Though oil price have moderated a bit, they still remain elevated, posing risk to inflation. Further core inflation increased significantly in past few months reflecting pass through of higher input costs and improving demand. Growth is expected to remain robust with GDP projected at 7.4% for FY2019.”

After two successive rate rises, it is unlikely that the next scheduled meeting of the rate-deciding committee in October will increase rates but it will watch with concern how global oil prices rise and fall. The peak of the festive and wedding season demand will take place after that meeting. The rise in repo rates is likely to have some impact on auto and housing loans but while the former will see little impact, the housing sector could not perk itself up even during India’s low rate regime.