RBI Monetary Policy 2018: For the second time in two months, the Reserve Bank of India Wednesday raised the interest rate by 0.25 per cent on inflationary concerns. The central bank, in its third bi-monthly policy of the current fiscal, raised benchmark repo or the short term rate at which it lends to other banks, by 0.25 per cent to 6.5 per cent.
The 6-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel kept its stance at neutral. For July-September, it pegged CPI-based retail inflation at 4.2 per cent which it saw firming up to 4.8 per cent in the second half of the current fiscal.
The projected inflation rate is above its targeted comfort level of 4 per cent. The RBI retained the GDP forecast for the current fiscal at 7.4 per cent on robust corporate earnings and buoyant rural demand, though it flagged global trade tensions for Indian exports. It also saw the GDP forecast at 7.5-7.6 per cent in the second half of the current fiscal.
The hike in June was the first time the benchmark lending rate was raised in over four years. This is now the first time since October 2013 that the central bank has raised the repo rate at two consecutive policy meetings. Also read | Pause or hike, opinion divided
Monetary Policy Committee announces bi-monthly review policy. Follow LIVE UPDATES.
Essel Mutual Fund on RBI rate hike
The RBI MPC seems to have signalled its concerns by hiking rates twice in a row, said Killol Pandya, Head, Fixed Income, Essel Mutual Fund. From the market perspective, he said, this policy may be considered to be neutral with hawkish undertones.
RBI MPC seems confident that economic recovery (including rural and urban consumption) seems to be on a ‘firm footing’, Pandya said, adding that it seems satisfied with the robust capital markets despite acknowledging a reduction in FDI and FII flows into EMs (including India).
"Overall, the policy was reasonably cautious from the bond market perspective. We have been espousing a case for maintaining lower duration and believe this policy validates our concerns. While we do not rule out trading opportunities, we are also not expecting an incremental change in our investment strategy or interest rate outlook on the basis of this policy. We reiterate our case for investors opting for Accrual based products for now," he said.
Housing sales to get affected with RBI's decision to hike policy rates: Realtors
Housing sales are likely to be affected post RBI's decision to hike key policy rates as this could lead to increase in interest rate on home loans, according to property developers and consultants. "From a real estate perspective, this hike will negatively impact buyer sentiment with the logical result on quantum of sales," Realtors' body NAREDCO President Niranjan Hiranandani said.
Anand Rathi chief economist reacts on RBI rate hike
“We felt that RBI would wait for another policy meeting before taking the decision to hike rate. We think that today’s decision has been driven by six factors – (1) continued hardening of inflation, especially core inflation, (2) RBI’s resolve to stay ahead of the curve and rather err on the side of caution, (3) sharp hike in kharif MSP, (4) loose fiscal policies (e.g.) farm loan waver being undertaken by many state governments, (5) continuation of high crude oil prices and (6) relative weakness of rupee, which is inflationary. With 50 bps rate hike in quick succession, we expect the RBI to remain in the pause mode for at least couple of policy meets barring greater than expected flaring of retail inflation,” said Sujan Hajra, Chief Economist, Anand Rathi Financial Services.
RBI does not believe govt's projections on inflation and fiscal deficit: Chidambaram
Back to back increases because RBI does not believe government's projections on inflation and fiscal deficit.— P. Chidambaram (@PChidambaram_IN) August 1, 2018
RBI wishes to contain inflation as well as discourage government from exceeding the borrowing target in an election year.— P. Chidambaram (@PChidambaram_IN) August 1, 2018
RBI pegs retail inflation at 4.8% for second half of FY19
The RBI pegged retail inflation at 4.8 per cent for the second half of current fiscal expecting increase in food prices due to hike in minimum support price. For the July-September quarter, it has projected inflation to be at 4.6 per cent.
Retail inflation has been projected to rise further to 5 per cent in the first quarter of next financial year 2019-20. "The inflation outlook is likely to be shaped by several factors. First, the central government has decided to fix the minimum support prices (MSPs) of at least 150 per cent of the cost of production for all kharif crops for the sowing season of 2018-19.
"This increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second round effects on headline inflation," RBI said in its third bi-monthly policy review.
On MSP hike, RBI said there is a considerable uncertainty and the exact impact would depend on the nature and scale of the government's procurement operations. "As such, only the incremental increase in MSPs over the average increase in the past will impact inflation projections.
"Second, the overall performance of the monsoon so far augurs well for food inflation in the medium-term. Third, crude oil prices have moderated slightly, but remain at elevated levels. Fourth, the central government has reduced Goods and Services Tax (GST) rates on several goods and services," RBI said.
This will have some direct moderating impact on inflation, provided there is a pass-through of reduced GST rates to retail consumers, it added.
Bankbazaar CEO on RBI rate hike
Bankbazaar CEO Adhil Shetty said that the rate hike was on expected lines as the central bank has been mandated by the government to keep the inflation rate at 4%. "Besides, the rupee has weakened, crude prices have remained volatile, and government expenditure is expected to rise with the upcoming Lok Sabha elections," he said.
IMPACT ON LOANS and ADVICE TO LOAN CUSTOMERS: Loans will get marginally costlier. In June, several leading banks including SBI had increased their MCLR. With the rate hike today, we could see further rate hikes. On a loan of Rs. 1 lakh for 20 years at an interest rate of 8.5%, the EMI is Rs. 868. If the rate rises to 8.75%, the EMI increases to 884. If the interest rate reaches 9%, the EMI becomes Rs. 900. In a rising rate scenario, it makes immense sense for customers repaying loans to make periodic principal pre-payments. This is especially helpful while you’re in the first half of your loan tenure. Pre-payments made in the first half have immense impact in reducing your long-term interest outgo and thus ensuring savings.
Home, car loan, EMIs to get costlier as RBI hikes repo rate by 25 basis points
For those who have taken loans from banks, the RBI's latest development has come as a bad news. The move will lead to an increase in the interest customers pay on loans (home loan, car loan or personal loan.)
The RBI's second consecutive increase in repo rate will also lead to an increase in your EMI.
RBI Governor Urjit Patel addressing press conference
Keeping the GDP forecast for the current fiscal unchanged at 7.4 per cent, RBI Governor Urjit Patel said the industrial growth strengthened in April and FDI improved in the first two months.
RBI keeps GDP forecast for the current fiscal unchanged at 7.4 per cent
The RBI kept the GDP forecast for the current fiscal unchanged at 7.4 per cent and saw it at 7.5-7.6 per cent in the second half of the current fiscal. The country's central bank also pegged retail inflation at 4.8 per cent for the second half of the current fiscal.
What is repo rate ?
Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
RBI hikes repo rate by 25 basis points to 6.5%
RBI's Monetary Policy Committee has decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.5% Consequently, the reverse repo rate under the LAF stands adjusted to 6.25% and marginal standing facility rate and Bank Rate to 6.75%.