RBI Policy Highlights: A Repo Rate Hike After 4 Years

RBI governor Urjit Patel (right) and deputy governor Viral Acharya. Photo: Mint

Mumbai, India, June 7, 2018//- 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%.

Of the 15 economists surveyed by Mint, 11 expect the central bank to keep the rate unchanged at 6%. Only four economists expect RBI to raise rates by 25 basis points (bps).

Here are the latest updates on RBI’s monetary policy decision:

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.

■ The minutes of the MPC’s meeting will be published by 20 June. The next meeting of the MPC is scheduled on 31 July-1 August.

Rupee, bonds fall after RBI hikes repo rate

The Indian rupee and 10-year bond prices on Wednesday erased all the morning gains after the Reserve Bank of India raised its benchmark interest rate for the first time since 2014.

The rupee was trading at 67.16 against the US dollar, 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% from its Tuesday’s close of 7.834%. Bond yields and prices move in opposite directions.

Real estate sector will have no impact, says JLL India’s Ramesh Nair

“The RBIs 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,” says Ramesh Nair, CEO and country head, JLL India.

“The decision was highly expected but will be very critical as the government enters into the election year.”

“The hike may seem to dampen sentiments in the market but in terms of real estate may have little or no impact.

As almost all home loans these days are on floating rates, the rise and fall in home loan rates does not impact the performance of residential real estate sector much and tends to balance each other out over long term,” Nair added.

Urjit Patel: RBI will remain cautious in managing growth, inflation

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.

What analysts say about RBI rate hike decision

Sudhakar Pattabiraman, head of research operations at William O’Neil’s MarketSmith, MumbaiI was not expecting the hike to happen this month, but was expecting it in August.

If the current trend of increasing inflation and oil prices continues, we expect another 25 bps hike somewhere during the year. The committee seems to be pretty clear that there should not be an effect from the rate hike on economic growth.

Sujan Hajra, chief economist and executive director, Anand Rathi Shares and Stock Brokers

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-dependant.

Sumedh Deorukhkar, senior economist, BBVA, Hong Kong

“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.

Tanvee Gupta Jain, chief India economist, UBS Securities India Pvt Ltd, Mumbai

We were already pricing in a 40 pct probability of a rate hike in this policy, and 50 bps rate hike in FY19. We do expect one more rate hike by the Monetary Police Committee over the next few months, most likely in August, if oil prices continue to remain higher. (Reuters)

Sensex jumps 300 pointsBSE Sensex traded higher by 284.61 points, or 0.82%, to 35,187.82, while the Nifty 50 rose 92.90 points, or 0.88%, to 10,686.05.

All members voted for rate hikeAll the six members of the rate setting committee have voted for a 25 bps increase in the rate.

The minutes of the MPC’s meeting will be published by 20 June. The next meeting of the MPC is scheduled on 31 July-1 August.

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.

Full text of RBI’s monetary policy statementRead the full text of RBI’s second bi-monthly monetary policy statement, 2018-19 here.

MPC maintains neutral policy stance

In line with the 25 bps hike in repo rate, the reverse repo rate stands adjusted to 6.0%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%.

The decision of the MPC is consistent with the neutral stance of monetary policy.

Maintains GDP growth forecast for 2018-19 at 7.4%The central bank retained the GDP growth for 2018-19 at 7.4% as in the April policy. 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, financial market volatility, trade protectionism to impact domestic growth,” said RBI in the statement. “Consumption, both rural and urban, remains healthy and is expected to strengthen further.”

RBI’s inflation forecast for 2018-19

MPC revised CPI inflation for 2018-19 to 4.8-4.9% in the first half and 4.7% in the second half, including the HRA impact.

“In the last meeting, the central bank projected CPI inflation in the range of 4.7-5.1% in the first half and 4.4% in the second half, including the HRA impact.

“Actual inflation outcomes since the April policy have evolved broadly on the lines of the projected trajectory.

However, there has been an important compositional shift. While the summer momentum in vegetable prices was weaker than the usual pattern, there was an abrupt acceleration in CPI inflation excluding food and fuel,” the statement said.

RBI hikes the repo rate by 25bps to 6.25%The Reserve Bank of India has increased the key repo rate by 25 basis points to 6.25%.

Divided MPC?The April policy saw RBI deputy governor Viral Acharya’s clear indication that in all probability his next vote will be for a rate hike. Chetan Ghate had also flagged off concerns over rising inflation and structural risks to inflation. Assuming that Acharya and Ghate along with Patra vote for a hike and the other two members—Pami Dua and Ravindra Dholakia—opt for status quo, the final casting vote will be with the governor. The market will closely watch out for any such signals.

Sensex, Nifty rise ahead of RBI decision on ratesIndian shares perked up on Wednesday, as value buying set in ahead of a decision on monetary policy by the Reserve Bank of India (RBI) where it is widely expected to keep benchmark interest rates on hold.

An increasing number of economists expect the central bank to raise interest rates, a Reuters poll showed, but most still think it will stay put and use this week’s meeting to prepare for a rate increase in August.

Three likely scenarios that can emerge from today’s policy

Even as the market expects status quo, there are three likely scenarios that can emerge from today’s policy. First RBI could maintain a pause in policy rate with change in stance from neutral to hawkish, signalling that more rate hikes are imminent.

The second scenario is when the RBI could hike the policy rates, and lastly a rate hike followed by a hawkish stance.

RBI rate hike seen unlikelyThe Reserve Bank of India’s (RBI) monetary policy committee (MPC) is likely to keep policy rates unchanged in its second bi-monthly monetary policy review meeting of 2018-19, but may raise them at its next meeting in August, say economists.Of the 15 economists surveyed by Mint, 11 expect the central bank to keep the repo rate—the rate at which the central bank infuses liquidity in the banking system—unchanged at 6%. Only four economists expect RBI to raise rates by 25 basis points (bps).

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