RBI rate hike to avoid drifting away from inflation mandate, says Patel

RBI Governor Urjit Patel today said the second 25 bps rate hike in as many months is to ensure that the Reserve Bank doesn't drift away from its 4-per cent inflation mandate and keeps moving towards the target on sustainable basis.

Listing out a rash of headwinds -- higher risks to inflation driven by domestic and external factors, trade wars which are slipping into a "currency war now", uneven global growth and spiralling crude prices -- RBI hiked the short-term policy rates or repo rate by a quarter of a percentage point to 6.5 per cent.

RBI bit the bullet for the first time since January 28, 2014 -- when rates were hiked to 8 per cent -- during the June 6 policy this year by hiking rate to 6.25 per cent from 6.

In the subsequent years, it had cut the rates on six occasions. In its last revision, on August 2, 2017, rates were cut by 25 basis points to 6 per cent.

Following the second hike today, the BSE Sensex slipped from record high to ends 84.96 points lower at 37,521.62. Anticipating firming of interest rate, SBI has raised fixed deposit rate by up to 0.1 per cent. Other banks are also likely to firm up lending rates making loans costlier for borrowers.

The over-5-page policy statement said however that almost all these headwinds are "evenly balanced". It even marginally revised downwards the central bank's as well as the Monetary Policy Committee's (MPC) inflation forecast for the first half of 2018-19.

SBI chairman Rajnish Kumar said the move "is a clear desire to frontload the rate hike cycle. Simultaneously, the decision to keep the stance in neutral mode indicates RBI willingness to be flexible and accommodative with global growth continuing to be uncertain."
Defending his neutral stance despite the hikes, Patel said: "So, it is based on the objective that has been given to us, data prints and our projections going forward."
Patel said: "Many of these risks are on both sides and that is why we have said these projections are against the backdrop of balanced risks."
"We have emphasised that we'd need to monitor domestic inflation very carefully. For these two reasons the stance is retained at neutral and the risks around the projection are balanced."
Describing the impact of the steep MSP hike something very challenging to assess properly, deputy governor Viral Acharya said: "What is known as of now is that the increase for khariff crops is much larger than the average increase seen in the past few years."