RBI DOES THE EXPECTED – HIKES RATE BY 25 BPS

By Ruma Dubey

RBI did pretty much what was expected - it hiked rates by 25 bps. It removes the air of uncertainty, removes all questions about when and how much for the next couple of months now.

The RBI adopted a neutral stance despite having hiked the inflation target for H2FY19 from 4.7% to 4.8% and for Q1FY20, inflation target is at 5%. So inflation target is raised yet the overall tone is neutral.

Thus for the market, the fact that the uncertainty is over and done with and RBI adopting a neutral stance were good enough reasons to bounce back after the initial reaction.

A quick look at the RBI policy highlights:

• Hike in repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.5 per cent.
• Reverse repo rate under the LAF stands adjusted to 6.25 per cent
• Marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent
• The decision of the MPC is consistent with a neutral stance
• Objective - 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
• Inflation outlook shaped by – implementation of MSP, fairly good monsoon, crude oil prices remain elevated, reduction in GST, higher input costs and increasing demand and lastly, volatile financial markets.
• Inflation is projected at 4.6 per cent in Q2, 4.8 per cent in H2 of 2018-19 and 5.0 per cent in Q1:2019-20
• GDP growth projection for 2018-19 is retained, as in the June statement, at 7.4 per cent, ranging 7.5-7.6 per cent in H1 and 7.3-7.4 per cent in H2, with risks evenly balanced;
• GDP growth for Q1:2019-20 is projected at 7.5 per cent
• Risk factors which could impact prices – rising crude prices, volatile global financial markets, higher household inflation, disparity in regional distribution of monsoon, fiscal slippages and staggered impact of HRA revision by state governments may push headline inflation up.
• Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity.
• 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.
• The next meeting of the MPC is scheduled from October 3 to 5, 2018.