RBI hikes repo rate by 25 bps to 6.25%

The MPC at its meeting today decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.25 per cent.

Consequently, the reverse repo rate under the LAF stands adjusted to 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent, RBI stated in a release.

The MPC decision was taken on the basis of an assessment of the current and evolving macroeconomic situation and is consistent with the neutral stance of monetary policy, RBI said.

The hike in repo rate is also intended to tame rising inflation and is in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth, RBI stated.

RBI noted that since the last meeting of the MPC in April, global economic activity has continued to expand, though there has been some easing of momentum.

While manufacturing and services sectors expanded in April, global tensions have not eased yet, which in turn caused a decline in export orders and air freight.

Crude oil prices rose sharply till 24 May on heightened geo-political tensions, but moderated thereafter on expectations of easing of supplies by the Organisation of Petroleum Exporting Countries (Opec) and Russia.

Base metal prices, especially aluminium, have risen on account of US sanctions on Russia. Gold has witnessed selling pressure on a stronger dollar, but the metal gained last week on political uncertainty in the Euro Area. Inflation pressures have emerged in some key advanced and emerging economies, driven in part by rising commodity prices.

Provisional estimates of national income, released on 31 May, showed that gross domestic product (GDP) for 2017-18 grew at an estimated 6.7 per cent,

up by 0.1 percentage point from the second advance estimates released on 28 February. This increase in growth has been underpinned by a significant upward revision in private final consumption expenditure (PFCE) due especially to improved rural demand on the back of a bumper harvest and the government’s thrust on rural housing and infrastructure.

On the supply side, estimates of agriculture and allied activities have been revised upwards, supported by an all-time high production of foodgrains and horticulture during the year.

India Meteorological Department's (IMD) forecast a normal south-west monsoon rainfall, which was reaffirmed on 30 May. This augurs well for the agricultural sector.

Industrial production growth also strengthened, reflecting the robust performance of manufacturing, which accelerated for three consecutive quarters in Q4.

Although services sector growth was revised downwards on account of lower growth in some constituents such as trade, hotels, transport and communication, and financial services, it remained robust.

Construction activity recorded the highest growth in Q4 in the new series (base 2011-12). Various high frequency indicators also suggest resilient performance of the service sector. Improving sales of tractors and two-wheelers suggest strengthening of rural demand.

However, retail inflation, measured by the year-on-year change in the CPI, rose sharply to 4.6 per cent in April, driven mainly by a significant increase in inflation excluding food and fuel.

Excluding the estimated impact of an increase in house rent allowances (HRAs) for central government employees, headline inflation was at 4.2 per cent in April, up from 3.9 per cent in March.