In a significant development, the Reserve Bank for the first time in four-and-half-years raised key interest rate or the repo rate by 25 basis points to 6.25% on inflation concerns arising from surge in international oil prices. Repo rate is a rate of interest charged by the RBI to lend short-term loans to the commercial banks.
Though in a good sign for the larger macro-economic picture, the central bank retained GDP growth projection at 7.4% for 2018-19.
The resulting pick-up in the momentum of inflation excluding food, fuel and HRA has imparted persistence into higher CPI (Consumer Price Inded) projections for 2018-19, RBI said in the policy. Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook both on the upside and the downside, it said.
In the second bi-monthly monetary policy for the current fiscal, the central bank revised upwards the retail inflation range to 4.8-4.9 per cent in the first half of 2018-19, and 4.7 per cent in the second half. It includes the impact from HRA for central government employees, with risks tilted to the upside.
With all the six members voting for a increase in policy rates, the Monetary Policy Committee raised “repo rate by 25 basis points and kept the stance neutral”, RBI said in a statement here.
The Reserve Bank also retained growth projections for the current fiscal at 7.4 per cent on hopes of further boost to investments and higher consumption. The Indian economy had grown at 6.7 per cent last fiscal.
“Investment activity, in particular, is recovering well and could receive a further boost from swift resolution of distressed sectors of the economy under the Insolvency and Bankruptcy Code,” the monetary policy statement issued by the RBI said.
On the basis of an overall assessment, GDP growth for 2018-19 is retained at 7.4 per cent as in the April policy, the RBI said. RBI had projected GDP growth to be between 7.5-7.6 per cent in the April-September period and 7.3-7.4 per cent during October-March, with risks evenly balanced.
It said that with improving capacity utilisation and credit offtake, investment activity is expected to remain robust even as there has been some tightening of financing conditions in recent months.
Global demand has also been buoyant, which should encourage exports and provide a further thrust to investment. Besides, consumption, both rural and urban, remains healthy and is expected to strengthen further, the RBI said.
It, however, said that geo-political risks, global financial market volatility and the threat of trade protectionism pose headwinds to the domestic recovery.
“It is important that public finances do not crowd out private sector investment activity at this crucial juncture. Adherence to budgetary targets by the Centre and the States which appears to be the case thus far will also ease upside risks to the inflation outlook considerably,” the RBI said.
Since the Monetary Policy Committee (MPC) meeting in early April, the price of Indian basket of crude surged from USD 66 a barrel to USD 74.
(With inputs from PTI)