RBI Monetary Policy, June 6th, 2018
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The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) has decided to increase the key repo rate—the rate at which the central bank infuses liquidity in the banking system—by 25 basis points to 6.25%.
Key highlights of RBI’s monetary policy announcement:
- RBI raises the key repo rate—the rate at which the central bank infuses liquidity in the banking system—by 25 basis points to 6.25%.
- Concurrently, the reverse repo rate adjusted to 6.0%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%.
- CPI inflation forecast for 2018-19 revised to 4.8-4.9% in the first half and 4.7% in the second half, including the HRA impact.
- Projection for GDP growth for 2018-19 was maintained at 7.4%. GDP growth is projected in the range of 7.5-7.6% in first half and 7.3-7.4% in second half.
- Geo-political risks, global financial market volatility and the threat of trade protectionism pose headwinds to the domestic recovery.
- Investment activity is recovering well and could receive a further boost from swift resolution of distressed sectors of the economy under the Insolvency and Bankruptcy Code.
- Crude oil prices and uncertain global financial markets development risk to inflation outlook.
- Adherence to budgetary targets by the centre and the states will ease upside risks to the inflation outlook considerably. Moreover, normal and well distributed monsoon temporally and spatially may help keep food inflation benign.
MPC's Minutes and the consensus among its members:
- The minutes of the MPC’s meeting will be published by 20 June, 2018. The next meeting of the MPC is scheduled on 31 July and 1 August, 2018.
- The central bank will remain cautious and vigilant on managing the risks to growth and inflation, governor Urijit Patel told reporters.
- Deputy governor Viral Acharya said that RBI will use appropriate instruments to manage liquidity as the surplus is likely to dip later this month.
- All the six members of the rate setting committee have voted for a 25 bps increase in the rate.
- Swift debt resolution under IBC could boost investments.
- The MPC notes that domestic economic activity has exhibited sustained revival in recent quarters and the output gap has almost closed. 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 aftermath of the announcement of key rates:
- Rupee, bonds fell after RBI hiked repo rate. The Indian rupee and 10-year bond prices erased all the gains after the Reserve Bank of India raised its benchmark interest rate for the first time since 2014.
- The rupee which traded at 67.16 against the US dollar, went down 0.02% from its previous close of 67.15. The currency opened at 67.12 a dollar and touched a high and a low of 66.96 and 67.16, respectively.
- The 10-year bond yield stood at 7.876%. Bond yields and prices move in opposite directions.
Industry and Analysts' reactions:
- Real estate sector will have no impact, says JLL India. Further, it is being said that the RBI decision to increase repo rates by 25 bps to 6.25% after 4 years speaks of a carefully deliberated decision in light of the recent inflationary pressure on the economy.
- During this calendar year, the Reserve Bank of India is unlikely to do any further rate hikes, and beyond that, it will be extremely data-dependent.
- Rate hike is pre-emptive and in line with the Reserve Bank of India’s neutral-to-hawkish policy tone.
- The RBI has sounded more sanguine over growth prospects going forward, while flagging upside risks to inflation, particularly emanating from higher crude oil prices and the wage-price setting process due to closure of output gap.
- Expect one more rate hike before the end of calendar year 2018 if core inflation remains elevated despite some potential moderation in growth.