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RBI raises interest rate by 0.25% on inflationary concerns

Author: PTI/Wednesday, August 1, 2018/Categories: Economy

RBI raises interest rate by 0.25% on inflationary concerns

Mumbai, Aug 1 - 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% 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%. The marginal standing facility (MSF) rate and the Bank Rate were also raised to 6.75%.

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%. 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% to 6.25%. That increase was the first since January 28, 2014 when rates were hiked by a similar proportion to 8%.

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%.

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% on a durable basis," it said.

With regard to inflation, RBI said, it is projected at 4.6% in second quarter, and 4.8% in the second half of 2018-19.

Excluding the Housing Rent Allowance (HRA) impact, CPI-based retail inflation is projected at 4.4% in second quarter, 4.7-4.8% in second half of the current fiscal.

In last review, inflation for 2018-19 was projected at 4.8-4.9% in first half and 4.7% 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% 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.

Based on an overall assessment, it said, GDP growth projection for 2018-19 is retained, as in the June statement, at 7.4%, ranging 7.5-7.6% in first half and 7.3-7.4% in second half, with risks evenly balanced.

Five members of MPC -- Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral V Acharya and Urjit R Patel voted in favour of the decision while Ravindra H Dholakia voted against the decision.

"The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth," he said.

The next meeting of the MPC is scheduled from October 3 to 5, 2018.

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