The Reserve Bank for the second time in two months today raised its benchmark interest rate by 25 basis points on inflationary concerns, a move that will make home, auto and other loans expensive.
With five of its members voting for the increase, the 6-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel, increased repo rate, at which it lends to other banks, to 6.5 per cent but kept its policy stance as “neutral”.
The reverse repo rate, at which it borrows from banks, was also raised by similar proportion to 6.25 per cent. The marginal standing facility (MSF) rate and the Bank Rate were also raised to 6.75 per cent.
Following the rate hike, the BSE index Sensex slipped from record high to ends 84.96 points lower at 37,521.62.
Anticipating firming of interest rate, country’s largest lender SBI has raised fixed deposit rate by up to 0.1 per cent. Other banks are also likely to firm up lending rates making loans costlier for borrowers. RBI had last raised the repo rate on June 6 by 0.25 per cent to 6.25 per cent. That increase was the first since January 28, 2014 when rates were hiked by a similar proportion to 8 per cent.
In the subsequent years, RBI cut interest rate on six occasions. In its last revision, on August 2, 2017, rates were cut by 25 basis points to 6 per cent.
In the third bi-monthly monetary policy of the 2018-19, RBI today cited various concerns to inflation like volatile crude prices, uncertainty in the global financial market, hardening of input prices for corporates, uneven distribution of rainfall, fiscal slippages and rise in MSP of foodgrains.
“Against the above backdrop, the MPC decided to increase the policy repo rate by 25 basis points. The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis,” it said.
With regard to inflation, RBI said, it is projected at 4.6 per cent in second quarter, and 4.8 per cent in the second half of 2018-19.
Excluding the Housing Rent Allowance (HRA) impact, CPI-based retail inflation is projected at 4.4 per cent in second quarter, 4.7-4.8 per cent in second half of the current fiscal.
In last review, inflation for 2018-19 was projected at 4.8-4.9 per cent in first half and 4.7 per cent in second half, including the HRA impact for central government employees, with risks tilted to the upside.
“Excluding the impact of HRA revisions, CPI inflation was projected at 4.6 per cent in H1 and 4.7 per cent in H2. Actual inflation outcomes have been slightly below the projected trajectory as the seasonal summer surge in vegetable prices has remained somewhat muted in comparison with its past behaviour and fruits prices have declined,” it said.