The Reserve Bank of India (RBI) on Wednesday increased repo rate by 25 basis points (bps) to 6.25%, while maintaining a neutral stance in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of 2%, while supporting growth. Consequently, the reverse repo rate under the liquidity adjustment facility (LAF) is adjusted to 6.0%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%.
"A major upside risk to the baseline inflation path in the April resolution has materialised, with 12% increase in the price of Indian crude basket, which was sharper, earlier than expected and seems to be durable. Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook – both on the upside and the downside. Several other risks, like uncertain global financial market, significant rise in households’ inflation expectations, staggered impact of house rent allowance (HRA) revisions, impact of revisions of maximum support price (MSP), remain," the Monetary Police Committee (MPC) said.
All members of the MPC, including, Dr Chetan Ghate, Dr Pami Dua, Dr Ravindra H Dholakia, Dr Michael Debabrata Patra, Dr Viral V Acharya and Dr Urjit R Patel voted in favour of the decision to hike repo rate.
Addressing media following the policy announcement, RBI Governor Dr Patel elaborated that the neutral stance allowed various options to the central bank and was not in contradiction to raising rates.
"The neutral stance leaves all options open... other central banks do the same, there is no contradiction here," he said in response to a query.
"We have kept the neutral stance as well as responded to the risks to inflation visible in recent months. Inflation has remained over the target level of 4 per cent for over six months," he added.
The six-member MPC voted unanimously for the rate hike that the central bank was undertaking after more than four years and comes for the first time under the Prime Minister Narendra Modi-led government.
The RBI also revised upwards the retail inflation range to 4.8-4.9% during the first half of 2018-19, and to 4.7% for the second half, including the impact of HRA for central employees, and with risks on the upside.
"The April-May prints show that inflation, excluding food and fuel has hardened. Higher oil prices and input costs have added to the upside risks," RBI Deputy Governor Viral Acharya said.
"On the other hand, growth indicators show that economic revival is on sound footing. Given the inflation target of 4%, it seemed the right time for the MPC to consider a hike of 25 basis points," he added.
The country's retail inflation rose to 4.58% in April from a rise of 4.28% in March and 2.99% in the corresponding period of the previous year.
The fourth quarter estimate of Gross Domestic Product (GDP) released by the Central Statistics Office last month estimated the growth rate at 7.7%, as against 5.6%, 6.3% and 7%, respectively during the first three quarters.
Recent crude oil price volatility imparts considerable uncertainty to the inflation outlook, the RBI said.
"Since the MPC meeting in early April, the price of the Indian basket of crude surged from $66 a barrel to $74. This, along with an increase in other global commodity prices and recent global financial market developments, has resulted in a firming up of input cost pressures," the statement said.
To arrive at this decision, the MPC extended its deliberations this time by an extra day.