Mumbai: The Reserve Bank of India (RBI) on Wednesday hiked the key policy rate by 25 bps to 6.5 per cent on the back of rising inflation, GST rate cut, volatility in global financial markets, rising crude oil prices and several other factors.
Announcing the third bi-monthly monetary policy the RBI governor Dr Urjit Patel said the reverse repo rate under the LAF stands adjusted to 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.
This is the second hike in interest rate after four years of continuous halt by the central bank.
The Monetary Policy Committee (MPC) has again maintained the neutral stance of monetary policy to achieve the medium-term target for consumer price index (CPI) inflation of 4 per cent in a band of +/- 2 per cent.
Notably, in June, the Reserve Bank of India had hiked the key rate by 0.25 percent to 6.25 pc.
RBI noted that retail inflation, measured by the on-year change in the CPI, rose from 4.9 pc in May to 5 pc in June, driven by an uptick in inflation in fuel and in items other than food and fuel even as food inflation remained muted due to lower than usual seasonal uptick in prices of fruits and vegetables in summer months.
Adjusting for the estimated impact of the 7th central pay commission's house rent allowances (HRA), headline inflation increased from 4.5 pc in May to 4.6 pc in June. Low inflation continued in cereals, meat, milk, oil, spices and non-alcoholic beverages, and pulses and sugar prices remained in deflation, RBI said.
Crude oil prices have moderated slightly, but remain at elevated levels, RBI said in a statement.
While the recent GST rate cut may translate to moderating on inflation in case of a pass-through to consumers, inflation in items excluding food and fuel is seen to be broad-based and has risen significantly in recent months, reflecting greater pass-through of rising input costs and improving demand conditions.
RBI has projected inflation at 4.6 pc in Q2, 4.8 per cent in H2 of 2018-19 and 5.0 per cent in Q1:2019-20, with risks evenly balanced. Excluding the HRA impact, CPI inflation is projected at 4.4 per cent in Q2, 4.7-4.8 per cent in H2 and 5.0 per cent in Q1:2019-20, said the report.
The progress of the monsoon so far and a sharper than the usual increase in MSPs of kharif crops are expected to boost rural demand by raising farmers' income. Robust corporate earnings, especially of fast moving consumer goods (FMCG) companies, also reflect buoyant rural demand.