RBI announces 25 bps hike in repo rate; 10 key takeaways from RBI policy

The Reserve Bank of India (RBI) has decided to finally fall in line with what the bond markets were suggesting by increasing its repo rate to align with market rates after a prolonged pause. All members of the Monetary Policy Committee (MPC) voted in favour of the rate hike.

RBI hiked repo rate by 25 basis points to 6.25 percent and reverse repo to 6 percent.

Following are the key highlights of the MPC policy:

1. Maintains neutral stance: MPC has maintained its neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent.
2. Inflation revised upwards: MPC has projected CPI inflation for 2018-19 to 4.8-4.9 percent in H1 and 4.7 percent in H2, including the HRA impact for central government employees, with a possibility of upside risk. Excluding the impact of HRA revisions, CPI inflation is projected at 4.6 percent in H1 and 4.7 percent in H2. The policy in April had kept the CPI inflation in the range of 4.7-5.1 percent in H1 and 4.4 percent in H2, including the HRA impact for central government employees with risks tilted to the upside. Excluding the impact of HRA revisions, CPI inflation was projected at 4.4-4.7 percent in H1:2018-19 and 4.4 percent in H2.
3. Core inflation plays the spoilsport: CPI inflation excluding food and fuel rose sharply in April over March by 80 basis points to reach an ex-HRA level of 5.3 percent. The price of Indian basket of crude shot up from $66 a barrel to $74 which along with an increase in other global commodity prices resulted in a firming up of input cost pressures. The resulting pick-up in the momentum of inflation excluding food, fuel and HRA has imparted persistence into higher CPI projections for 2018-19.
4. Pick-up in investment activity: The policy notes that with improving capacity utilisation and credit offtake, investment activity is likely to remain robust. Global demand has also been buoyant, which should encourage exports and provide a further thrust to investment.
5. Growth rate maintained: The MPC has maintained its GDP growth for 2018-19 at 7.4 percent announced in April policy. GDP growth is projected in the range of 7.5-7.6 percent in H1 and 7.3-7.4 percent in H2.
6. Uncertainty and tailwinds can push inflation: The policy report says that global and domestic uncertainty there is potential risk to baseline inflation. Apart from a 12 percent increase in the price of Indian crude basket, MPC feels that the significant rise in households’ inflation could feed into wages and input. Impact of HRA revisions by various state governments may push headline inflation up, not to forget the revision in the MSP formula for Kharif crops.
7. Economic activity on sustained revival path: MPC has noted that domestic economic activity has exhibited sustained revival and more importantly in the output gap has almost closed, indicating a strong possibility of sustained growth over the next few quarters.
8. IBC can fuel growth: Even as economic activity is picking up the MPC notes that it could receive a further boost from swift resolution of distressed sectors of the economy under the Insolvency and Bankruptcy Code (IBC). Clearing stressed assets as soon as possible can help revive the banking as well as manufacturing segment.
9. Strong agriculture growth: There has been record food and horticulture output production in the country. On a quarterly basis, agriculture growth increased sharply in Q4 of 2017-18 which is expected to continue if the India Meteorological Department (IMD) forecast a normal monsoon holds true.
10. Trade war concern: The MPC has also noted that global financial market volatility and the threat of trade protectionism pose headwinds to domestic recovery. Slowing exports on account of trade war can result in an all-round impact on the economy.