RBI hikes repo rate by 0.25 per cent to 6.5 per cent on inflationary concerns

The Reserve Bank of India during its monetary policy review on Wednesday raised the interest rate by 0.25 per cent for the second consecutive time in last two months on inflationary concerns. The inflationary pressure arises due to hikes in minimum support prices for the crop.

The six-member monetary policy committee, headed by RBI Governor Urjit Patel decided to maintain a neutral policy stance, keeping its options open for further rate hikes.

The central bank in its third bi-monthly policy of the current fiscal raised benchmark repo, or the short-term rate at which it lends to other banks, by 0.25 per cent to 6.5 per cent.

For July-September, it pegged CPI-based retail inflation at 4.2 per cent which it saw firming up to 4.8 per cent in the second half of the current fiscal.

The projected inflation rate, however, is above its targeted comfort level of 4 per cent.

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Talking about the recent MSP hike, the RBI in its policy statement said, "This increase in MSPs for Kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second-round effects on headline inflation".

“The MPC notes that domestic economic activity has continued to sustain momentum and the output gap has virtually closed,” the policy statement added.

"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," the statement said.

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Addressing a press conference in Mumbai, Urjit Patel also highlighted the central bank's concerns over crude oil prices which remain elevated despite a slight moderation.

However, RBI kept the GDP forecast for the current fiscal unchanged at 7.4 per cent and saw it at 7.5-7.6 per cent in the second half of the current fiscal.

(With inputs from agencies)