RBI raises repo rate to 6.25%, reverse repo rate to 6%

Economists expect all monetary policy committee members to concur with RBI deputy governor Viral Acharya’s view on ‘withdrawal of accommodation

RBI raises repo rate to 6.25%, reverse repo rate to 6%

India's central bank raised its benchmark interest rate for the first time since 2014 to curb rising price pressures and calm financial markets as policy tightening in the US rattles emerging markets.

In addition, all the six members of the committee voted unanimously to hike repo rate by 25 basis points.

The central bank had chose to hold the repo rate at 6% in its April policy meet.

The reverse repo rate is used as a tool to control the money supply in the country.

This is the first time that the six-member MPC, headed by RBI Governor Urjit Patel, is meeting for three days instead of the usual two since it was constituted in June 2016.

Others hope that the MPC will continue to maintain status quo for longer.

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For growth, the overall growth in GDP is retained at 7.4%.

On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) chose to: increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.25 percent.

RBI kept cash reserve ratio and statutory liquidity ratio unchanged at 4% and 19.5%, respectively. GDP growth is projected in the range of 7.5-7.6% in H1 and 7.3-7.4% in H2, with risks evenly balanced, RBI said. The hike comes after a long gap of four years.

"The decision of the Monetary Policy Committee (MPC) 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% within a band of +/- 2%, while supporting growth", the RBI had said in its April statement.

Last month, central banks in emerging economies like Indonesia and the Philippines, where foreign inflows have been hit by a depreciating currency, raised interest rates. The last time this benchmark rate was raised was in January 2014. Another hike in repo rate by upto 50 basis point is expected between August and October.

"Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook - both on the upside and the downside", it said. The central bank in April revised the inflation projection to 4.7-5.1% in the first half of the financial year 2018-2019 and 4.4% in the second half of the fiscal.

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