India hikes interest rates for first time in four years

Economists expect all monetary policy committee members to concur with RBI deputy governor Viral Acharya’s view on ‘withdrawal of accommodation

The Reserve Bank for the first time in four-and-half-years raised key interest rate today by 25 basis points to 6.25 % on inflation concerns arising from surge in global oil prices.

In a survey of 41 economists by Bloomberg, 27 had predicted that the MPC will keep rates on hold in the June meeting.

For this meet, ten percent of the bankers expected the repo rate to be raised by 25 basis points, while 90% expected the repo rate to be unchanged for now and for the central bank to raise the rates in August.

"Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook - both on the upside and the downside".

The country's retail inflation rose to 4.58 per cent in April from a rise of 4.28 per cent in March and 2.99 per cent in the corresponding period of the previous year.

The RBI had kept the benchmark repo rate unchanged in April at 6% and the reverse repo rate unchanged at 5.75%.

The Reserve Bank of India's monetary policy committee (MPC) sounded optimistic on investment and noted that consumption demand remains strong in the Indian economy. The volatility in crude oil prices and global financial markets, rise in domestic household inflation expectations, hardening of wages and input costs and the impact of implementation of house rental allowance by various state governments are some key upside risks, the statement said. If the MPC goes wrong in its inflation projection, it can very well advance a rate hike. "It will be followed up with further increases in the next six months or so and we expect the repo to reach 6.75 percent by the first quarter of 2019".

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Meanwhile, in the 16 consecutive increases since May 14, petrol price was hiked by Rs 3.8 per litre and diesel by Rs 3.38.

Last month, central banks in emerging economies like Indonesia and the Philippines, where foreign inflows have been hit by a depreciating currency, raised interest rates.

Despite the rate hike, the stance is still neutral, which is good, said VK Sharma, Head Private Client Group & Capital Market Strategy at HDFC Securities.

"However, given that the committee has maintained a neutral stance, there remains room for manoeuvrability in policy perspective should incoming data show sharp fluctuations". "While the summer momentum in vegetable prices was weaker than the usual pattern, there was an abrupt acceleration in CPI (consumer price index) inflation excluding food and fuel", the RBI statement said.

The six-member MPC, including Urjit Patel, RBI governor, voted in favour of a rate hike. "Given the worldwide conditions - rising oil prices, the Fed's rate policy and the fact that other emerging markets have already begun raising rates - RBI should have probably raised rates earlier".

The central bank has retained the full-year economic growth forecast at 7.4%.

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