Rising oil prices and its inflationary impact has forced the Reserve Bank of India to hike the repo rate by 0.25 per cent for the first time in over four years.
The move will lead to higher EMIs for home, auto and other loans as the banks are likely to pass on the hike to their customers. Anticipating a rise in interest rate, several banks, including SBI, ICICI and Bank of Baroda, had in last one week raised lending rates by up to 0.1 per cent making loans costliers. Experts feel there will be more rate hike in the coming months.
The hike in policy rates by the RBI on Wednesday came as a surprise for analysts, who cautioned to brace for more such moves in the future as the Central bank has upped its inflation forecast.
All six members of the Monetary Policy Committee (MPC) — Chetan Ghate, Pami Dua, Ravindra H Dholakia, Michael Debabrata Patra, Viral V Acharya and Urjit Patel —unanimously supported to increase the repo rate to 6.25 per cent but kept the policy stance as “neutral”. The reverse repo rate at which the RBI borrows from banks was also raised by similar proportion to 6 per cent.
This is the first increase in interest rate since January 28, 2014, when rates were hiked by a similar proportion to 8 per cent. The RBI retained the GDP growth forecast for 2018-19 at 7.4 per cent on hopes of further boost to investments and higher consumption.
In the second bi-monthly monetary policy of the 2018-19, the RBI saw major upside to inflation from higher oil prices but kept its GDP growth outlook unchanged at 7.4 per cent for the financial year. Consumer Price Index (CPI) based retail inflation was projected at 4.6 per cent for the April-September period and 4.7 per cent in second half of 2018-19 fiscal.
RBI Governor Urjit Patel said the MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis. 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 per cent within a band of +/- 2 per cent, while supporting growth, he added.
Retail inflation has been sharper than anticipated and it remained above the 4 per cent target in last 6 months, with the RBI maintaining status quo during the period. As per the latest print, retail inflation inched up to 4.58 per cent in April.
Reacting to rate hike, Icra Ratings’ managing director and chief executive Naresh Takkar said the rate hike will push up bank lending rates, impacting their margins, and may also test the strength of the investment recovery in FY19. “Based on the past narrative of the RBI, we did not anticipate...With this hike, the RBI has already signalled a reversal on policy rates, and we believe one more may be in store during FY19,” the rating agency said.
The agency’s rival Care Ratings said it had anticipated for a status quo in rates at the policy announcement and added that it expects “at least” another 0.25 per cent hike in rates by December and possibly one more by March next year.