RBI hikes repo rate by 25 basis points to 6.50% amid inflation concerns

This was the first time since October 2013 that the central bank has hiked repo at two consecutive policy meetings

The Reserve Bank of India (RBI) increased its key repo rate by 25 basis points to a two-year high of 6.50 per cent on Wednesday, a move aimed at keeping inflation under check.

This was the first time since October 2013 that the central bank hiked the repo rate --- the rate at which it lends to commercial banks --- at two consecutive policy meetings.

The six-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel kept its stance at neutral as it sought to contain inflation while not choking growth. Five of the six members on the rate panel voted for the rate increase.

"Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity," the MPC warned in its policy statement.

The reverse repo rate --- the rate at which the RBI borrows from commercial banks --- was raised by 25 basis points, to 6.25 per cent. One basis point is one hundredth of a percentage point. 

In its third bi-monthly policy review, the central bank kept the GDP forecast for the current fiscal unchanged at 7.4 per cent and saw it at 7.5-7.6 per cent in the second half of the current fiscal. It pegged retail inflation at 4.8 per cent for the second half of the current fiscal.

Inflation concerns

In June, the repo rate was raised for the first time in over four years, by 25 basis points to 6.25 per cent. 

The government has decided to fix the minimum support prices (MSPs) of at least 150 per cent of the cost of production for all kharif crops for the sowing season of 2018-19.

"This increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second round effects on headline inflation," the RBI said.

The August move came after India's annual consumer inflation hit 5 per cent in June, the eighth straight month it topped the RBI's medium-term 4 per cent target.

Global crude oil prices have surged nearly 20 per cent this year and crossed $80 a barrel in May, their highest since 2014.

This has driven the prices of fuel --- the biggest item on India's import bill --- to record highs at a time the rupee is testing new life lows, raising the threat of imported inflation.

Moreover, the monsoon, one of the largest determinants of India's inflation path, have been erratic and patchy in several regions this year, muddying the outlook for winter-harvested crops and adding to inflationary pressures.