RBI hikes repo rate 25bps to 6.25 pc; GDP to grow at 7.4 pc




In Q4, economy grew fastest in last seven quarters/

Inflation projections between 4.8 & 4.9 pc in H1

MUMBAI: At last, after an interval of about four-and-half years, the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) unanimously voted for a hike of 25 basis points in its key repo rate – to 6.25 per cent.

Consequently, the reverse repo rate under the liquidity adjustment facility (LAF) stands adjusted to 6 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent.

The quarterly data suggest that the economy grew at 7.7 per cent in the fourth quarter of 2017-18 – the fastest pace in the last seven quarters. Gross fixed capital formation (GFCF) growth accelerated for three consecutive quarters up to Q4.

On the basis of an overall assessment, GDP growth for 2018-19 is retained at 7.4 per cent as in the April policy. GDP growth is projected in the range of 7.5-7.6 per cent in first half (H1) and 7.3-7.4 per cent in H2, with risks evenly balanced.

The RBI’s MPC has kept its inflation projections between 4.8 and 4.9 per cent in the first half, which is in line with what it projected earlier.  It noted that since the MPC’s meeting in early April, the price of Indian basket of crude surged from $66 a barrel to $74.  Alongside the increase in global commodity prices, recent global financial market developments have resulted in a firming up of input cost pressures, the official MPC statement noted.

Retail inflation, measured by the year-on-year change in the CPI, rose sharply to 4.6 per cent in April, driven mainly by a significant increase in inflation excluding food and fuel. Excluding the estimated impact of an increase in house rent allowances (HRAs) for central government employees, headline inflation was at 4.2 per cent in April, up from 3.9 per cent in March

The Central Statistics Office (CSO) released on May 31 the quarterly estimates of national income accounts for Q4, 2017-18 and provisional estimates for 2017-18. Gross domestic product (GDP) growth for 2017-18 has been estimated at 6.7 per cent, up by 0.1 percentage point from the second advance estimates released on February 28.

“The decision of the MPC at its second bi-monthly meeting in the current financial year is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” a statement from RBI said.

Crude oil prices rose sharply till May 24 on heightened geo-political tensions, but moderated thereafter on expectations of easing of supplies by the Organisation of Petroleum Exporting Countries (OPEC) and Russia.

In the US, the 10- year sovereign yield crossed 3 per cent in mid-May on strong economic data as well as expectations of tighter monetary policy and fiscal expansion, but softened subsequently on safe haven demand; yields softened in other key advanced economies (AEs) as well.

In most emerging markets (EMEs), however, bond yields have risen on reduced foreign appetite for their debt due to growing dollar shortage in the global market and on prospects of higher interest rates in AEs.



One Comment

  • Francis P P says:

    What I wonder, you mean increasing repo is a positive sign? If the business wants to grow, RBI should reduce the repo rate. Now all interest rates will be up. Since lending rates will be costly, money flow will curtail. Idea is to curb inflation. Please go through some economics.

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