RBI hikes repo rate for the first time in four years, loans to cost more

The Reserve Bank of India’s (RBI’s) monetary policy committee increased the central bank’s benchmark interest rate by 25 basis points, citing inflationary pressures on the back of rising crude oil prices.

The six-member committee voted unanimously to hike the central bank’s repo rate, or the rate at it which lends to banks by 25 basis points to 6.25% from 6% earlier in its second bimonthly monetary policy review of fiscal year 2019. The reverse repo rate has also been raised by 25 basis points to 6%.

Last month, central banks in emerging economies like Indonesia and the Philippines, where foreign inflows have been hit by a depreciating currency, raised interest rates. The rupee, along with the peso and rupiah, has been one of Asia’s worst performing currencies in the first six months of 2018, according to Bloomberg.

The RBI decision will make a range of loans more expensive. Several banks including SBI, ICICI Bank, Punjab National Bank and Bank of Baroda have already raised their marginal cost of funds-based lending rate.

An RBI release said the decision of the MPC, led by RBI governor Urjit Patel, was consistent with its neutral monetary policy stance, keeping with its objective of achieving 4% (+/-2%) retail inflation in the medium term.

At a press conference, Patel said RBI will remain cautious and vigilant on managing the risks to growth and inflation.

The central bank had decided to hold the repo rate at 6% in its April policy meet. This is the first time that the Reserve Bank of India has hiked the repurchase rate since January 2014.

In a survey of 41 economists by Bloomberg, 27 had predicted that the MPC will keep rates on hold in the June meeting.

“The MPC has hiked rates keeping in mind the external factors weighing on the economy. Crude oil prices since the last monetary policy review have moved to $80 per barrel, from the RBI’s expectation of $65 per barrel. The rate hike was important to stabilise a weak rupee. The policy statement further notes a pick-up in domestic investment in the last quarter, and the central bank expects it to continue. It is, hence, the right time to increase rates”, said Kuntal Sur, Financial Services risk and regulatory leader, PwC India.

In its monetary policy statement, RBI revised retail inflation projections for the first half of FY19 to 4.8-4.9%, and 4.7% in the second half. RBI retained its Gross Domestic Product (GDP) growth projection for the financial year at 7.4 per cent.

“The recent hike in crude prices and better GDP for the last quarter of FY18 suggest inflation trajectory may be on the higher side. Though this may put some pressure on borrowers, it is positive news for the savers in the economy, ” said Anita Gandhi, wholetime director at Arihant Capital Markets in Mumbai.

Deputy governor Viral Acharya said RBI will use appropriate instruments to manage liquidity as the surplus is likely to dip later this month.