New Delhi
India’s monetary policy committee voted unanimously to increase the benchmark repo rate for the first time in more than four years, as it tries to fend off rising inflation pressures.
The repo rate was raised by 25 basis points to 6.25 percent. The last time this benchmark rate was raised was in January 2014. The reverse repo rate stands increased to 6 percent from 5.75 percent. Fourteen of 43 economists polled by Bloomberg had forecast a 25 basis point hike in rates.
Post the rate hike, the MPC maintained its monetary policy stance at ‘neutral’, giving it the flexibility to move in either direction.
The decision of the MPC 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 percent within a band of +/- 2 percent, while supporting growth.MPC
The MPC’s decision to hike policy rates comes against the backdrop of rising inflation, higher oil prices and a weaker currency.
The committee expects retail inflation at 4.8-4.9 percent in the first half of the year and at 4.7 percent in the second half of the year.
Retail inflation, which the MPC targets, stood at 4.58 percent in April. Core inflation rose to a near four-year high of 6 percent. The MPC is targeting to maintain inflation in a band of 4 (+/- 2) percent. Since the last policy review, oil prices have risen by close to 12 percent and the rupee has depreciated nearly 3 percent.
A major upside risk to inflation has materialized due to higher oil prices, noted the MPC. It added that there has been a “significant rise” in household inflation expectations which could feed into wages and input costs.
Meanwhile, growth has recovered along expected lines even though it remains supported by government spending. GDP growth rose to 7.7 percent in the fourth quarter of the financial year 2017-18 compared to 7 percent in the third quarter. The MPC sees GDP growth at 7.4 percent in FY19. Investment activity is recovering well and could receive a further boost from resolution of stressed assets, the MPC noted.
RBI Lets Banks Spread MTM Losses Over 4 Quarters
The Reserve Bank of India allowed banks to spread April-June mark-to-market losses over four quarters, starting from three months ended June 2018. The circular in this regard will be issued within a week, the RBI said.
“It has been decided to grant banks the option to spread the mark-to-market (MTM) losses on investments held in Available for Sale (AFS) and Held for Trading (HFT) portfolio for the quarter ending June 30, 2018, equally over a period of four quarters, commencing from the quarter ending June 30, 2018,” said the RBI’s statement on developmental and regulatory policies.
