Published: Wed, August 01, 2018
Markets | By Otis Pena

RBI monetary policy: Repo rate hiked by 25 bps

The RBI's Monetary Policy Committee (MPC) raised the repo rate INREPO=ECI by 25 basis points to 6.50 percent.

Analyst said that this hike by RBI will not majorly affect non-resident Indians in the UAE, except those who are holding floating mortgage rates back home in India because most of the existing auto and personal loans are obtained at a fixed rates.

This was the first time since October 2013 that the central bank hiked the repo rate -- the rate at which it lends to commercial banks -- at two consecutive policy meetings. In its last revision, on August 2, 2017, rates were cut by 25 basis points to 6 per cent.

The RBI said the inflation outlook is likely to be shaped by the minimum support prices (MSPs), which have been raised sharply, elevated crude oil prices, and reduced Goods and Services Tax (GST) rates on several goods and services.

"There might not be much urgency in delivering back-to-back rate hikes when the policy stance is still neutral". The 0.25 per cent rise in interest rates came after a prolonged period of four-and-a-half-years.

The monetary policy committee of a country uses the reverse repo rate as a tool to control the money supply in the country.

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RBI had increased the benchmark short term lending rate (repo rate) by 0.25% to 6.25% in its last policy review in June on inflationary concerns.

Five of the six members on the panel voted for a rate increase in the latest policy review.

Excluding the Housing Rent Allowance (HRA) impact, CPI-based retail inflation is projected at 4.4 per cent in the second quarter, 4.7-4.8 per cent in second half of the current fiscal. Wednesday's repo rate hike was on expected lines, an SBI representative said, adding, "What we will do is to evaluate further".

The retail inflation, which is factored in by the MPC, spiked to a five-month high of 5% in June on costlier fuel.

A high repo rate means that banks borrow funds from the RBI at a higher rate, increasing their cost of funds.

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