India: RBI hikes rates for the second time in three months in August
August 1, 2018
At its monetary policy meeting on 31 July–1 August, five out of the six central bankers of the Reserve Bank of India (RBI) voted to raise interest rates by 0.25 percentage points. As a result, the repo rate now stands at 6.50%, the marginal standing facility (Bank Rate) at 6.75% and the reverse repurchase rate at 6.25%. The RBI’s decision to raise rates for the second time in three months was driven by high inflation and a weak rupee.
Inflation has accelerated in recent months, hitting a five-month high of 5.0% in June, which is above the 4% midpoint of the Reserve Bank of India’s 2–6% target range. At its monetary policy meeting in August, the RBI maintained its inflation forecast for Q2 FY 2018—which runs from July to September—at 4.6%. It slightly raised its projection for the second half of FY 2018—which runs from October to March—to 4.8%, up from 4.7%.
Meanwhile, the Reserve Bank of India left its GDP growth forecast for FY 2018 unchanged in August at 7.4%, which would mark the largest economic expansion since FY 2015. However, despite the strong economy, the Indian rupee has been one of the worst performing currencies in recent months, weakening over 6% against the USD since January amid high oil prices and outflows from India’s stock and bond markets. August’s hike should provide some support to the rupee in the coming months.
All in all, the Reserve Bank of India had room to maneuver in August. At its meeting, it once again reaffirmed its commitment to achieving the medium-term target for headline inflation of 4%. It also reiterated its “neutral” stance to monetary policy, which aims to produce neither a positive nor negative effect on economic growth, but instead guide price levels. The next monetary policy meeting is scheduled for 3–5 October.
On the outlook for interest rates, research analysts from Nomura commented:
“The RBI has delivered back-to-back hikes while maintaining a neutral stance, as we have expected. In our view, its reluctance to shift to a ‘tightening’ stance suggests that it is not convinced that a series of hikes is warranted, possibly because of global growth risks or because it expects inflation to gradually taper. Having delivered a cumulative 50bp of rate hikes already and with a real repo rate of ~1.7% (6.5% repo minus the RBI’s average CPI forecast of 4.8% in [FY18]), we expect the RBI to wait and see what kind of impact the already-delivered hikes will have. Therefore, we expect rates will be left unchanged through [FY18].”
Author: Edward Gardner, Economist