RBI Monetary Policy: How rising inflation surprised central bank, effecting first rate hike under Modi

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Updated: June 7, 2018 10:35:15 AM

Citing fear of inflation, partly fueled by recent hike in crude oil prices, Reserve Bank of India (RBI) in its June monetary policy effected a 25 basis points (bps) hike in repo rate.

RBI, inflation,  Q4FY18 GDP RBI said that it had not anticipated a 12 percent hike from to a barrel, in the Indian basket of crude oil between April and June monetary policies. (Reuters)

Citing fear of inflation, partly fueled by recent hike in crude oil prices, Reserve Bank of India (RBI) in its June monetary policy effected a 25 basis points (bps) hike in repo rate. The inflation outlook was revised yet again after the central bank in its April policy had actually lowered inflation forecasts for the first and second half of the 2018-19. Changing the inflation outlook once again, RBI revised H1 FY19 retail inflation projections to 4.8-4.9 percent than the earlier projections of 4.7-5.1 percent with upside risks. For H2 FY19, the expectations for retail inflation have been revised upwards to 4.7 percent from the earlier estimate of 4.4 percent.

RBI said that it had not anticipated a 12 percent hike from $66 to $74 a barrel, in the Indian basket of crude oil between April and June monetary policies. “Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook outlook on the upside and the downside,” the policy statement said.

Talking to reporters, RBI Governor Urjit Patel said that the central bank will continue to remain cautious and vigilant in which the balance of risks and both, growth and inflation, play out.

“RBI & MPC credibility plummets to the lowest in years as they hike rates after projecting benign inflation conditions for the next two years just 2 months back,” veteran market investor Sandip Sabharwal tweeted.

Commenting on today’s monetary policy statement announced by RBI on Wednesday, Rashesh Shah, President, FICCI said, “Today’s 25 bps rise in repo rate by RBI is based on the ground realities and it indicates towards the positive sentiments in the economy.”

Meanwhile, CARE Ratings said: “We expect one more interest rate hike by at least 25 bps during the calendar year 2018 whereas we cannot rule out the possibility of two rate hikes by the end of the financial year 2018-19, which will be dependent on the developments at the global front with regard to oil prices and its likely impact on domestic inflation.”

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