RBI hikes key rate second time in two months

Mumbai: Home, auto and personal loans are set to get costlier as the Reserve Bank of India on Wednesday raised the repo rate, the rate at which it provides funds to banks, by 25 basis points, citing runaway inflation.

This is the second consecutive rate hike by the RBI after it increased the repo rate by similar percentage points in its June policy meeting. However, the monetary policy committee (MPC) maintained its neutral stance on its policy outlook. Following the hike, the repo rate stands at 6.5 per cent and the reverse repo rate under the liquidity adjustment facility (LAF) stands adjusted to 6.25 per cent.

“The reason for changing the policy rate is to ensure that on a durable basis, we come to and maintain the four per cent inflation target. We have been away from the four per cent number for several months now. And we took two steps — once in June and once in August — to maximise our chances that we don’t drift away from four per cent and in fact move towards four per cent on a more durable basis,” said RBI governor Urjit Patel. The MPC is also worried over the impact of the minimum support price for kharif crops on inflation as it feels increase in MSP is much larger than the average increase seen over the past few years.

Over the last six to 12 months, said Dhaval Kapadia, director, portfolio specialist, at Morningstar Investment Adviser, borrowing costs for corporates, banks and other institutional borrowers have been rising with yields across the curve on instruments, ranging from commercial papers, certificates of deposits, corporate bonds, T-bills and government bonds rising by 125 to 150 basis points, probably on account of a reduced appetite for corporate lending by the banks.

“The RBI’s action to hike the repo rate by another 25 bps might result in a marginal increase in lending rates for corporate and retail borrowers with a lag,” he added.

The MPC noted that retail inflation, measured by the year-on-year change in the CPI, rose from 4.9 per cent in May to five per cent in June, driven by an uptick in fuel inflation.

While inflation projections for Q2 have been revised marginally downwards when compared to the June statement, projections for Q3 onwards remain broadly unchanged, with households’ inflation expectations, as measured by the Reserve Bank’s survey, rising significantly in the last two rounds. This, according to the RBI, could influence actual inflation outcomes in the months to come.

The MPC, however, expressed confidence about the growth recovery in the domestic economy with capacity utilisation at Indian factories staying robust and construction activity gaining momentum, which reflects the government’s thrust on national highways and rural housing.

“The output of eight core industries accelerated in June due to higher production in petroleum refinery products, steel, coal and cement. The assessment based on the RBI’s business expectations index for Q1FY19 remained optimistic notwithstanding some softening in production, order books and exports,” the RBI said.