By Elton Gomes
The monetary policy committee (MPC), headed by Reserve Bank of India (RBI) Governor Urjit Patel, hiked key policy rates by 25 base points at the end of the second bi-monthly policy meet on Wednesday. The revised repo rate now stands at 6.25% and it marks the first hike since the last four years.
The MPC presented a balanced view of the emerging market economies (EMEs) and the domestic economy, while alerting on the rising risks from crude prices and the increasing financial market volatility,” Anis Chakravarty, lead economist and partner, Deloitte India said in an interview with FirstPost. ”The RBI was cautious on the factors that could change the course of the underlying optimism, major among them being the projections on oil price movement and rising geopolitical tensions,”
Prior to the rates being announced, several media outlets deliberated over whether the rate would be hiked. According to a Bloomberg poll, 14 of 43 economists predicted a 25 basis point hike in the repo rate, hiking it up to 6.25%. If status quo is maintained, economists predict that it will be accompanied by a change in stance to withdrawal of accommodation, thereby suggesting the imminence of a rate hike, as reported by Bloomberg Quint.
A Reuters poll also depicted similar results, and further predicted that several economists think the RBI will maintain status quo and might hike rates in August.
However, Radhika Rao, India Economist with DBS Group, thinks there will be a hike in short-term lending rate in June itself. ”We expect the Monetary Policy committee to sound hawkish, with a rising probability that they will vote for a pre-emptive 25 bp rate hike in June, to maintain financial stability and contain second-round inflationary impact from higher oil prices and a weaker rupee,” Rao told the Times of India.
In a separate poll conducted after gross domestic product (GDP) data was released, 26 out of 56 economists expected the RBI to increase the repo rate. Another poll taken before GDP data showed that 21 of 57 economists favoured a hike in rates, the Times of India reported.
Assessing effects of the monsoons and global oil prices
Since the MPC met in April, oil prices have increased by 12% while the rupee has weakened by 3%. The inflation rate in the country could also vary depending on the upcoming monsoons. Such factors could give rise to mounting concerns of inflation, and a stringent monetary policy might be on the cards.
Assessing the rise and fall in future fuel prices will assume significance for the MPC. A Firstpost article deliberated that the MPC should wait for the Organization of the Petroleum Exporting Countries’ (OPEC) June meeting to gain an understanding of global oil prices.
Previously, the repo rate, which is the rate at which the RBI lends to banks, stood at six percent, whereas the reverse repo rate was 5.75%.
Elton Gomes is a staff writer at Qrius