The Reserve Bank of India (RBI) today increased its repo rate for the first time in 4 and half years signalling the end of its loose monetary policy stance.
Repo rates are interest rates at which the country's central bank lends money to banks. A rise in crude prices, falling rupee and a sharp increase in core inflation may have weighed on the mind of policy makers.
The repo rate has now increased to 6.25 per cent from the earlier 6 per cent.
"The decision of the Monetary Policy Committee is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," the RBI said in a release.
The consumer price inflation for April 2018 had also come in at 4.58 per cent, slightly above expectations. Banks have already raised lending rates and fixed deposit interest rates, as bond yields have strengthened over the last one year.
While banks have already raised lending rates, it's highly likely that we may see further action on lending rates going ahead.
In a clear stance, it now seems that there maybe further hikes from the RBI to tame inflation.
The projected CPI inflation for 2018-19 is revised to 4.8-4.9 per cent in H1 and 4.7 per cent in H2, including the HRA impact for central government employees, with risks tilted to the upside. Excluding the impact of HRA revisions, CPI inflation is projected at 4.6 per
cent in H1 and 4.7 per cent in H2.
"Crude oil prices have been volatile recently and this impartsconsiderable uncertainty to the inflation outlook - both on the upside and the downside. Several other risks remain. First, global financial market developments have emerged as another important source of uncertainty.
Second, the significant rise in households' inflation expectations as gathered in the May 2018 round of the Reserve Bank's survey could feed into wages and input costs in the coming months. However, the pass-through to output prices remains muted presently. Third, the staggered impact of HRA revisions by various state governments may push
headline inflation up," the RBI stated.
Clearly, the country's central bank sees renewed threat to inflation.