RBI hikes key rate 2nd time in two months

Posted August 05, 2018

Bankers today said the Reserve Bank of India's decision to hike repo rate by 25 basis points shows the apex bank's commitment to bring retail inflation to 4 per cent.

Thirty-seven of 63 economists in a Reuters poll last week said the RBI will raise rates n Wednesday, while 22 said the next hike would come later this year, or early in 2019.

The reverse repo rate or the rate at which RBI borrows from commercial banks stands adjusted to 6.25 per cent.

"While an interest rate rise is positive news for people living on their savings income, or holding pensions and investments, it may prove to be the tipping point for those in financial difficulty or struggling with debt", said Richard Haymes, head of financial difficulties at credit data firm TDX Group.

It touched the 5 per cent mark in June compared to 4.87 per cent in May and has gone beyond the RBI's revised inflation projection of 4.8-4.9 per cent for the first half of the current fiscal. Such increases operate through multiple channels in affecting inflation as there is a direct impact on the prices of targeted food items, he said.

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The Bank of England has raised interest rates to 0.75% today, the first time it's been above 0.5% since the financial crisis a decade ago.

How many more rate rises can we expect?

"The main argument for raising rates now is that it gives the Bank more room for manoeuvre when the next downturn hits".

"The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon".

Analysts at TD Securities point out that the RBI hiked the benchmark repo rate by 25bps to 6.50% as they and the consensus had expected.

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RBI's monetary policy committee (MPC), headed by governor Urjit Patel, maintained a neutral stance towards the monetary policy.

Economists have challenged the need for Thursday's hike given the risks posed by Brexit and the harm an escalating tariff conflict between Washington and Beijing could do to the global economy.

The Bank's last move to raise rates in November from 0.25% to 0.5% was the first such move for more than 10 years, but merely reversed the cut made in the aftermath of the Brexit vote. "Given this, we have to ensure that we run a tight ship on the risks that we control to maximize the chances of ensuring macro-economic stability and continuing with the growth profile of 7-7.5 percent". Unemployment is at its lowest level since the 1970s, wages are rising and inflation is above the bank's 2 per cent target, at 2.4 per cent.

"That will then force the banks to push through the bank rate rise".

The financial markets have taken this on board and are forecasting one, and perhaps two, rises of 0.25% before 2020.

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It said, various indicators suggest that economic activity has continued to be strong.