RBI Governor Urjit Patel-headed Monetary Policy Committee (MPC) on Wednesday announced a 25 basis points hike in repo rate to 6.25 per cent. The central bank also maintained its policy stance unchanged at 'neutral'. All six members of the MPC voted for an increase. The RBI reiterated its “commitment to achieving the medium-term target for headline inflation of 4 percent on a durable basis". The outcome of the three-day policy meet comes a week after official data showed GDP growth increased to 7.7 per cent in the January-March quarter - the fastest pace of growth in seven quarters. With that, India retained its position as the world's fastest growing major economy, ahead of China. The RBI had kept the repo rate - the key rate at which it lends to commercial banks - unchanged at 6 per cent in its last meeting.
Here are highlights of the RBI's policy statement:
"We expect inflation to maintain a northward momentum, especially if oil prices and rupee valuation do not stabilise in a scenario of hardening of domestic consumption. However, given that the committee has maintained a neutral stance, there remains room for manoeuvrability in policy perspective should incoming data show sharp fluctuations," he added. (What experts say)
According to Anis Chakravarty, lead economist and partner, Deloitte India: "The Monetary Policy Committee (MPC) presented a balanced view of the emerging market economies (EMEs) and the domestic economy, while alerting on the rising risks from crude prices and the increasing financial market volatility. The RBI was cautious on the factors that could change the course of the underlying optimism, major among them being the projections on oil price movement and rising geopolitical tensions."
"The RBI's decision to hike rates is a step in the right direction. The policy is hawkish on inflation but we like the confidence shown in the economy growth. Despite inflationary pressures RBI has stuck to its growth projections and guided for robust investment activities for FY19," said VK Sharma, head private client group & capital market strategy, HDFC Securities.
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Investment activity expected to remain robust: RBI Governor Urjit Patel
Here are some of the key things the RBI chief said:
- Over last three days, MPC carefully reviewed evolving global, macroeconomic developments
- Global economic activity, trade continued to expand; though some easing of momentum since April meet
- Inflation pressures emerged in some key advanced emerging economies, driven in part by rising commodity prices, especially crude oil
- Crude oil price, along with other commodities, has firmed up input cost pressures in higher CPI projects for 2018-19
- Policy stance retained at neutral
- MPC committed to keep inflation at 4% in medium term
- RBI to remain cautious, vigilant on managing risks to growth, inflation in economy
While summer momentum in vegetable prices was weaker than usual, there was an abrupt acceleration in CPI inflation excluding food, fuel: RBI
The increase of 25 basis points, or 0.25% in repo rate, marks the first since January 2014. That was in line with prediction by 46 per cent of respondents in a Reuters poll earlier this week.
Decision of MPC consistent with 'neutral' stance in consonance with objective of achieving medium-term retail inflation target of 4 per cent: RBI
The Reserve Bank of India announces a repo rate cut of 25 basis points to 6.25%
Fifteen minutes to go: The RBI will release its monetary policy statement at 2:30 pm. While the top brass with interact with the media at 2:45, separate interaction will be conducted with researchers and analysts through teleconference between 5:00 pm and 5:30 pm.
Food Minister Ram Vilas Paswan had said on Tuesday the government would announce support measures to cut a growing sugar surplus and prop up local prices, a move aimed at helping loss-making mills and millions of cane growers who make up a key voting bloc.
Sugar stocks jumped after reports of the government approving a bailout package worth Rs 7,000 crore for the sector. Dhampur Sugar Mills, Balrampur Chini Mills, Bajaj Hindusthan Sugar and Uttam Sugar Mills Thiru Arooran Sugars were up as much as 4 per cent on the BSE in afternoon trade.
The Cabinet approved a bailout package for the sugar sector, a government source said on Wednesday after a Cabinet meeting chaired by Prime Minister Narendra Modi, to help struggling mills and cane growers, news agency Reuters reported.
In less than an hour now, the RBI will be releasing its monetary policy statement. Governor Urjit Patel is scheduled to address a press conference held in Mumbai, along with other members of the MPC, at 2:45 pm. The top brass of the RBI will interact with the members till 3.05 pm. The media conference will be webcast on www.rbi.org.in, according to the RBI.
Back home, petrol and diesel prices were lowered in the range of 8-12 paise per litre today. That marked the eighth consecutive cut for petrol prices and the seventh in eight days in case of diesel. The rate cuts follow sixteen days of consecutive hikes. Currently, domestic petrol and diesel prices are revised on a daily basis, and the new rates effected at fuel stations at 6:00 am every day. Domestic fuel prices are determined broadly by the global crude oil and the rupee-dollar forex rates. (Read more)
Brent crude futures rose more than 1 per cent on Wednesday after Venezuela raised the prospect of halting some crude oil exports, news agency Reuters reported citing people familiar with the matter. However, gains were capped amid reports the US government had asked Saudi Arabia and some other OPEC producers to increase output, the agency added.
Falling production from Venezuela has contributed to a rally in global oil price Brent to nearly $80 a barrel. State firm PDVSA is considering declaring force majeure on some exports, three sources told Reuters, amid plummeting output from its oil fields and tanker bottlenecks at ports.
At 12:38 pm, the rupee was trading 11 paise higher at 67.05 against the US dollar. In the first half of the day, the rupee traded in the range of 67.11-67.01 against the greenback. "The market seems to have factored in a no rate change expectation for now and rupee seems to be range-bound between 67-67.30/35. However, in case of a rate change, rupee might strengthen to 66.80/90," said Salil Datar, CEO and executive director, Essel Finance VKC Forex. (Read more)
"The rupee has come under pressure and instead of a rupee appreciation which was the norm sometime back, the level of depreciation is being spoken of in the market... FPI flows have already witnessed the impact under these conditions. Therefore, monetary policy becomes critical not just in terms of rate action but also the 'tone'," CARE Ratings further said.
Retail inflation rose to 4.58 per cent in April, after easing for three straight months. Wholesale inflation - also known as headline inflation - rose to 3.18 per cent in April. This was the sixth straight month in which retail inflation level was higher than the RBI's medium-term target of 4 per cent. Higher inflation prompts the central bank to hike interest rates.
Both retail inflation and wholesale price inflation - determined by Consumer Price Index (CPI) and Wholesale Price Index (WPI) receptively - accelerated at faster-than-expected rates in April.
The RBI's credit policy comes at an important time when the perspective of the economic situation goes beyond the CPI inflation number which is officially targeted," said CARE Ratings, a credit ratings agency.
India is projected to regain its position as the world's fastest growing major economy advancing 7.3 per cent this fiscal year and 7.5 per cent in the next two years, World Bank said in its report, titled 'Global Economics Prospects'. The growth projections reflect "robust private consumption and strengthening investment".
"India's GDP growth bottomed out in the middle of 2017 after slowing for five consecutive quarters, and has since improved significantly, with momentum carrying over into 2018 on the back of a recovery in investment," it said.
An unexpected surge in inflation and economic growth rates have brought forward expectations for the next rate hike by more than a year, when just over a month ago, the RBI wasn't expected to raise rates until the second half of 2019.
The RBI is likely to adopt a hawkish tone, in shift from a 'neutral' stance, but is not expected to raise interest rates in this meet, say experts.
PSU bank shares rose ahead of the outcome of the RBI's policy statement. The Nifty PSU Bank, the NSE's sectoral index of state-run banking stocks, traded 1.6 per cent higher at noon. At 12:05 pm, SBI shares were trading 1.3 per cent higher while PNB was up 2.7 per cent. Ahhalabad Bank was up 6.9 per cent, Union Bank of India 3.2 per cent, Andhra Bank 2.8 per cent and OBC 2.8 per cent. (Read more)
"We pencil in 50 bps of rate hike (August and October) and expect June policy to strongly signal the same," Kotak noted. However, the RBI could have some space to maintain if MSP increases are in line with recent trends, it added.
The Monetary Policy Committee will be choosing either a wait-and-watch approach or being pre-emptive amid adverse inflation risks, according to brokerage Kotak Securities. "We now see scope of a shallow rate hike cycle which balances emerging price pressures with a nascent cyclical economic recovery. Our call is influenced by persistent shocks of higher fuel prices and weaker INR along with incipient risk of higher-than-usual MSP (Minimum Support Price) increases."
GDP growth accelerated to 7.7 per cent in the March quarter, according to official data released last week. That marked the fastest pace of GDP growth in seven quarters. Also, India retained its position as the world's fastest growing major economy in Q4, well ahead of China.
The RBI's outlook in its statement today will be guided by a rise in inflation and robust GDP growth registered by the economy in the January-March quarter.