RBI hikes repo twice in succession to bring it to 6.5%  

Continuing with the reversal of accommodation begun in June, the RBI on Wednesday again hiked its key lending rate by 25 basis points to bring the repo to 6.5% citing upside risks to inflation.

Addressing the media on the hike in the repo, or the short-term lending rate for commercial banks, Reserve Bank of India (RBI) Governor Urjit Patel said its monetary policy committee (MPC) noted that the rise in retail inflation has continued for the third consecutive month.

"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the MPC decided to increase the policy repo rate by 25 basis points to 6.5%," said the third monetary policy review statement of the current fiscal.

"Consequently, the reverse repo rate under the liquidity adjustment facility (LAF) stands adjusted to 6.25%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75%."

The statement noted that 'fuel and light group' inflation rose sharply in the period since the previous policy review, pulled up by liquefied petroleum gas (LPG) and kerosene prices.

The RBI, however, maintained its ‘neutral’ stance on policy, as it has done over five previous bi-monthly policy reviews which allows it to move either way on rates.

"The decision of the 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 per cent, while supporting growth," RBI said.

Retail inflation in India touched the 5% mark in June, compared to 4.87% in May and has gone beyond the RBI's revised inflation projection of 4.8-4.9% for the first half of the current fiscal.

Noting the government's decision to raise minimum support prices (MSPs) by at least 150% of the cost of production for all kharif crops, RBI said this is much higher than the average increase seen in the past few years.

"(This) will have a direct impact on food inflation and second round effects on headline inflation," the statement said.

The RBI maintained its inflation projection of 4.8% for the second half of 2018-19 and said it would touch 5% in the first quarter of the next fiscal 2019-20.

Uncertainty around domestic inflation needs to be carefully monitored in the coming months," Patel said.

The Governor also noted the high volatility in global crude oil prices and said that any fiscal slippage by the Central and state governments would have an impact on the inflation outlook.

Official data showed on Tuesday that the country's fiscal deficit rose further in June and stood at ₹4.29 lakh crore touching 68.7% of the current year's target.

Patel also pointed to the "tightening" condition of financial markets and recent global developments that could adversely impact India.

He said rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity.

"Geopolitical tensions and elevated oil prices continue to be the other sources of risk to global growth," he added.