RBI increases Repo rates by 25 basis points, medium-term target for headline inflation at 4% cited

The Monetary Policy Committee (MPC) in its meeting today revised the repo rate to 6.5%. Due to the evolving macro economic situations the MPC decided to increase the repo rate by 25 basis points. It cites commitment to achieve a medium term headline inflation target at 4%.

Dr. Chetan Ghate, Dr. Pami Dua, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Dr. Urjit R. Patel voted in favour of the decision; Dr. Ravindra H. Dholakia voted against the decision.

Reasons for increase in repo rate
  • Volatile crude oil prices that have risen due to geographical tension and low global demand could further pull down oil prices
  • Uneven global economic activity with advanced economies (AE) like US fairing well in Q2 while the emerging market economies (EME) like China losing pace in Q2- in an attempt to contain its debt
  • Household inflation expectations have risen significantly which could impact the actual inflation in the following months
  • Manufacturing firms polled in the Reserve Bank’s industrial outlook survey for hardened input price pressure in Q2
  • Monsoon distribution would have an effect on key CPI components for regional crops like paddy though it is normal temporarily
  • Fiscal slippage at Center/State level could have an impact on the finacial markets
  • The aftereffects of an increased MSP (Minimum Support Price) for kariffs crops (by the Central government) remains uncertain
  • HRA revisions (tax benefits) by various State governments may push headline inflation up
Outcome of revised repo rate

Inflation is projected at 4.6% in Q2 and 4.8% in H2 for the financial year 2018-19. GDP forecast for H2 is at 7.3% to 7.4% for the current fiscal. CPI inflation excluding HRA impact is set at 4.4% for Q2 of this fiscal.

Speculations are that banks will further unload these rates to customers and henceforth house, auto and other loans might get costlier.

MPC will have its next policy meeting on October 3 to 5.


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