Reserve Bank of India hikes key interest rate to 6.25%

Liquidity in the coming week could be a constraint as the US Federal Reserve is on course to increase interest rates in its June meeting

Liquidity in the coming week could be a constraint as the US Federal Reserve is on course to increase interest rates in its June meeting

This move comes after a gap of more than 4 years when the central bank last raised the repo rate. This was the first increase in repo rates since January 2014. "Given the inflation target of 4 per cent, it seemed the right time for the MPC to consider a hike of 25 basis points", he added. However, rather than wait for the threat of inflation to become clear, the panel advanced its action to proactively tame inflation. From the reply given by the Governor in the media interaction, it can be deduced that the RBI has no exchange rate objective, nor does it use the exchange rate as an instrument for managing inflation. "However it looks like that RBI taking note of both the domestic inflation and inflationary build up in combination with US Fed's stance with respect to unwinding of its balance sheet and guidance on fed rates, made a decision to go for an increase in the repo rate rather than waiting for more data and monsoon progress.", said Devendra Pant, chief economist, India Ratings and Research. Fuel price hike led to the rise in wholesale inflation in April. The central bank has now allowed 2% additional securities of the banks to be counted as SLR. The key drivers of inflation are clearly oil prices and the overall demand pressures that have pushed core inflation higher.

Growth is lifting, but in an environment of rising crude oil prices, a weakening rupee, and prospects of higher food inflation should the government successfully implement its policy to raise minimum support prices (MSP) and guarantee it to farmers.

A depreciating rupee will make purchase of crude oil costlier for Indian oil companies.

Interestingly, even with the RBI's neutral stance, interest rates for a number of instruments had already started hardening.

Many economists say a rate hike at this juncture could derail economic growth, which has recovered after setbacks from the after- effects of demonetisation and the roll out of goods and services tax (GST). IIM Ahmedabad's business inflation expectation survey for April 2018, released last week, suggests an increase in "year ahead" CPI expectation.

The Indian stock markets appear to have interpreted the MPC's decision to keep its neutral policy stance as a positive signal - with the Sensex up 276 points on Wednesday, though RBI Governor Urjit Patel has said that the central bank was keeping all options open.

"GDP growth and projections provide ample room for the RBI to hike rates and achieve its inflationary target in a reasonable manner", he told AFP.

RBI retains GDP growth projection at 7.4 per cent for 2018-19. Gross domestic product is likely to grow at 7.5% to 7.6% in the first half and 7.3% to 7.4% in the second half of the financial year.

But the MPC warned that geo-political factors, global financial volatility and trade protectionism pose a threat to the ongoing recovery. This could weaken the private sector's resolve to crank up investment.

The RBI has increased loan eligibility from Rs 28 lakh to Rs 35 lakh for those buying houses under the government's affordable housing scheme in metros.

This is subject to the condition that the price of a house, for which the loan is being availed, is less than Rs 45 lakh and Rs 30 lakh in metros and non-metro cities respectively.

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