Reserve Bank of India hikes policy rate by 25 bps to 6.25 pct

The Reserve Bank of Indian unanimously hiked its key policy repo rate by 25 basis points today to 6.25 percent. The hike was consistent with expectations. The central bank referred to three developments during its decision to hike the interest rate. Firstly, the 80 bps sequential rise in non-food and fuel inflation in April; secondly, the rise in the Indian basket of crude oil since the previous review in April along with a hardening of non-oil commodity prices; and thirdly a shift higher in household inflation expectations.

The RBI stated that that the rise in non-food and fuel inflation has passed on persistent into higher inflation expectations. In the meantime, inflation expectations have increased by 90 bps for the three-month and 130 bps for the one-year horizons in the May survey.

The central bank upwardly revised its projections for headline inflation for FY2019. It now expects inflation to average 4.8 to 4.9 percent in the first half and 4.7 percent in the second half, as compared with its April’s projection of 4.7 percent to 5.1 percent in the first half and 4.4 percent in the second half.

The RBI repeated the several upside risks to inflation. These include global financial market developments emerging as a source of uncertainty, the rise in inflation expectations, housing allowance revision by several state governments and higher minimum support prices for summer season agricultural crops.

Meanwhile, on the GDP growth front, the RBI retained its projection for FY2019 at 7.4 percent with risks evenly balanced. The central bank was of the view that investment activity is likely to remain solid amidst improving capacity utilization and credit offtake. Based on the GDP forecast, the MPC noted that the output gap has nearly closed, noted ANZ in a research report.

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