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Nothing neutral about August policy of Reserve Bank of India

02 August 2018

With concerns related to various inflationary risks amid narrowing of the output gap, the Monetary Policy Committee (MPC) voted 5:1 to hike the policy repo rate by 25 bps to 6.5 percent in the August 2018 policy review, as anticipated.

The reverse repo rate was also raised by 25 basis points, to 6.25 per cent.

"The RBI did not change its policy stance in June due to the various uncertainties they faced and the degree of uncertainty has gone up considerably compared to the last policy, so they would continue to retain the neutral stance", she said.

Which brings one to the important question of whether EMIs (equated monthly installments) on home, auto, personal and other loans are set to go up, now that the central bank has hiked key policy rates.

Given the increase in crude prices and higher inflation expectations, Valecha sees one or two more rate hikes by the RBI this year.

"There might not be much urgency in delivering back-to-back rate hikes when the policy stance is still neutral". The central bank has set a target to keep inflation at 4 per cent (+/- 2 per cent), the upside of which has now been breached for eight straight months.

The headline and core (excluding food and beverages and fuel and light) CPI inflation had risen to a five-month high 5 percent and a 47-month high 6.4 percent, respectively, in June 2018.

Five of the six members on the rate panel voted for a rate increase.

The RBI's policy statement also mentioned that minimum support price (MSP) hike as the primary factor stoking inflation this year.

HDFC's chief economist, Abheek Barua, said, today's policy decision suggests that the RBI seems to be taking a long term view on inflation rather than remaining purely data dependent.

Repo rate, short for Repurchase Rate, is basically the rate at which the RBI lends money to commercial banks against the pledge of government securities, whenever the banks are in need of funds to meet their day-to-day obligations.

The RBI kept the gross domestic product 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.