RBI raises repo rate by 25 basis points in first interest rate hike in four-and-a-half years; stance ‘neutral’

The Reserve Bank of India on Wednesday voted unanimously to hike repo rate by 25 basis points, in a first interest rate hike in four-and-a-half years, citing a major upside risk to the baseline inflation on the back of high crude oil price. The central bank said that there was a 12% increase in the price of Indian crude basket, which was “sharper, earlier than expected and seems to be durable”. The RBI kept the stance ‘neutral’.

“Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook – both on the upside and the downside,” the RBI said in the MPC statement. RBI’s MPC began its 3-day meeting on Monday. The six-member MPC, headed by Governor Urjit Patel, is meeting for three days for the first time instead of the usual two days due to some administrative exigencies.

Reversing the declining trend of three months, retail inflation inched up to 4.58% in April. The Wholesale Price Index (WPI) based inflation too rose to 3.18% in April mainly on account of a spike in fuel prices.  Most analysts, however, had expected the RBI to hold rates this time with a shift to the withdrawal of accommodation. Reuters Poll of 56 economists predicted RBI to hold rates now and hike it in August.

In the last monetary policy meet not only did the RBI maintain status quo with neutral stance but lowered its inflation forecast too — however, the minutes of the meeting showed a hawkish stance. Key MPC members including governor Urjit Patel said that even as inflation had softened, expectations were firmed up, both for three-month and one-year ahead horizons, emancipating from the impact of higher MSP, higher crude oil price to fiscal slippage.

Deputy governor Viral Acharya clearly had said that he has “moved closer to switching from the neutral stance to begin the process of withdrawal of accommodation” as the central bank needed to separate “signal” (food and fuel prices) from “noise” (vegetable prices) in the data.

Ahead of the RBI MPC meeting, India’s benchmark 10-year sovereign bond yields rose to their highest in two weeks to 7.90% on Monday, while the rupee on Wednesday strengthened by 11 paise to 67.04 against the dollar at the interbank forex market.