RBI Monetary Policy August 2018: takes interest rate to 2-year high of 6.5%

RBI Monetary Policy August 2018: takes interest rate to 2-year high of 6.5%

Courtesy : NJ02/08/2018 08:07

The Reserve Bank of India (RBI) pulled the trigger again to keep India’s inflation under control by raising the repo rate by 25 basis points in its August bi-monthly monetary policy meeting, taking it to a two-year high of 6.5%. The RBI has kept the stance ‘neutral’, which means that the future rate decision will be based on more data in upcoming months. The central bank aims to keep consumer price index (CPI) inflation of 4% within a band of +/- 2%.
The RBI MPC voted 5-1 in favour of the rate hike and listed seven risks that continue to persist from crude oil prices, volatility in global financial markets, households’ inflation expectations, hardening of input price, monsoon’s regional distribution, possibility of fiscal slippage to uncertainty around the full impact of hike in MSP announced by the government.
The repo rate hike is in line with the expectations. 33 out of 46 economists polled by Bloomberg expected a 25 basis point hike. RBI’s August monetary policy decision has come against the backdrop of the rise the in inflation, increase in bank credit and deposits growth, tight liquidity conditions, declining GSec yields, foreign fund outflows and depreciation in rupee.
 The central bank adjusted the reverse repo rate under the LAF to 6.25% and the marginal standing facility (MSF) rate and the Bank Rate to 6.75%. In June, the RBI had increased the repo rate by 25 basis points for the first time in four-and-a-half years, citing a major upside risk to the baseline inflation on the back of high crude oil price. The RBI began its 3-day meeting on July 31, which concluded on Wednesday.
Inflation and GDP projection:
The RBI projected inflation at 4.6 per cent in the second quarter and 4.8% in the second half of the fiscal year 2018-19. The invention projection for the first quarter of the next fiscal year is 5%.
The RBI retained the GDP growth projection for 2018-19 at 7.4%, ranging 7.5-7.6% in the first half and 7.3-7.4% in the second half of FY19. The GDP growth in the first quarter of FY20 is projected at 7.5%

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