Monday, 15 October, 2018

India raises key interest rate for second time to stave off inflation

RBI raises key policy rate by 25 bps to 6.50%, holds stance at neutral RBI hikes repo rate by 25 bps to 6.50%, EMIs may go up
Laurie Berry | 05 August, 2018, 19:44

The pound fell on Thursday despite the Bank of England lifting interest rates from crisis-era lows, after Governor Mark Carney said monetary policy needed to "walk not run" and expressed concern about the risks of a cliff-edge Brexit. The reverse repo rate was also raised by 25 basis points, to 6.25 percent.

The RBI said, "On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) chose to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.5 per cent". While inflation projection for the second half of 2018-19 fiscal year was raised to 4.8 per cent from 4.7 per cent, FY19 growth projection was retained at 7.4 per cent.

In its Quarterly Inflation Report, the Bank said: "Although in the past year the number of retail closures have increased and retail footfall has fallen, contacts of the Bank's agents suggest that mainly reflects shifts in consumer demand to online stores and from goods to services".

And with unemployment at its lowest rate in more than 40 years, it thinks pay increases will continue to pick up, creating inflation pressure.

The RBI's rate move is the second in eight weeks and follows emerging-market counterparts in Indonesia, the Philippines and elsewhere who are trying to counter currency routs and inflation risks triggered by higher USA rates and a stronger dollar.

The Reserve Bank of India Governor Urjit Patel attends a news conference after the bi-monthly monetary policy review in Mumbai, India April 6, 2017.

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The rate hike decision subdued the two key indices - NSE Nifty50 and the S&P BSE Sensex - and broke their week-long rally, with the wider Nifty50 settling at 11,346.20 points, lower by 10.30 or 0.09 per cent and the barometer closing the day's trade at 37,521.62 points, lower by 84.96 points or 0.23 per cent.

Mark Carney: "What banks pay (.) in terms of returns, partly depends on what it costs them to borrow in worldwide markets, and that had been very low at the time of the last rate increase". If the Bank of England raises the base rate by another 1.5%, then customers on Nationwide's main mortgage deal will see the cost of a £200,000 loan spike to £1,055 a month; £158 more than they are paying now.

The MPC said momentum in domestic economic activity continued to be sustained and the output gap had virtually closed. "While the tentative calm in the financial markets provides the RBI with the time and space to keep rates on hold, a pre-emptive move is preferable". This warrants tighter policy for now, but the RBI has also warned against anticipating too much tightening until the effects of the hikes delivered so far this year are fully transmitted, with a lag of a few quarters, in the real economy.

Why is the Bank raising rates?

But some economists have questioned whether the BoE was wise to raise rates with uncertainty surrounding the economy.

This meeting in August comes in the wake of rising inflation, falling rupee, rising crude oil prices, trade wars, and potentially currency wars.

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