RBI hikes interest rate for 2nd time in two months on inflation concerns

For the second time in as many months, RBI today raised the key interest rate by 0.25 per cent to the highest level in two years as it battled inflation without looking to harm growth, but the move may result in costlier home, auto and other loans.

With five out of the six members voting for the increase, the Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel increased repo rate, at which it lends to other banks, to 6.5 per cent from 6.25 per cent currently but kept its policy stance as "neutral".

In June, the MPC had raised the key rate by a similar 25 basis points or 0.25 per cent.

It was widely expected that Reserve Bank of India will wait for the full impact of increase in minimum support price (MSP) for kharif foodgrains, the monsoon progress and the US Fed outcome before hiking rates in October. However it chose to pre-empt inflation by hiking the rates by another 25 basis points ahead of the inflation risks actually manifesting itself.

RBI expects the inflation rate to gradually go up to 5 per cent by the first half of 2019-20, which will be an election year.

The reverse repo rate, at which it borrows from banks, was also raised by similar proportion to 6.25 per cent.

The marginal standing facility (MSF) rate and the Bank Rate were raised to 6.75 per cent. The RBI chose not to tinker with the CRR or with the SLR, which are currently steady at 4 per cent and at 19.5 per cent respectively.

After delivering the first back-to-back rate increase since it was set up in September 2016, the MPC warned that "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."
Patel too gave a warning. "We have already had a few months of turbulence behind us and it looks like that this is likely to continue. For how long, I don't know. The trade skirmishes evolved into tariff wars and now we are possibly at the beginning of currency wars."