India: RBI hikes rates in June for the first time since 2014
June 6, 2018
The Reserve Bank of India (RBI) acted at its monetary policy meeting on 4–6 June, with central bankers unanimously agreeing to raise interest rates by 0.25 percentage points. Therefore, the repo rate now stands at 6.25%, the marginal standing facility (Bank Rate) at 6.50% and the reverse repurchase rate at 6.00%. The RBI’s decision to raise rates for the first time since 2014 was driven by rising inflationary pressures and a strong economy.
Inflation has accelerated in recent months—it hit a four-month high of 4.9% in May. At its monetary policy meeting in June, the RBI raised its inflation forecast for the first half of fiscal year 2018—which began in April and runs to the end of September—to 4.8–4.9%, up from the previous 4.4–4.7% forecast. It also raised its forecast for the second half of FY 2018—which runs from October 2018 to the end of March 2019—to 4.7%, up from 4.4% previously.
Meanwhile, the economy expanded at the fastest pace in seven quarters at the end of FY 2017 and is seen performing well through FY 2018. The Reserve Bank of India left its GDP growth forecast for FY 2018 unchanged at 7.4%, which would be the largest economic expansion since FY 2015.
All in all, the Reserve Bank of India had room to act against rising inflationary pressures and raise rates in June. At its meeting, the RBI once again reaffirmed its commitment to its data-dependent and wait-and-see approach to policy going forward. It also highlighted that its policy stance will overall continue to remain geared towards producing only a neutral effect on economic growth.
The next monetary policy meeting is scheduled for 31 July and 1 August.
On the outlook for interest rates, research analysts from Nomura commented:
“[We] expect another 25bp hike at the 1 August policy review meeting, followed by continuation of the status quo. Growth and inflation are still heading higher, which should result in further front-loaded policy tightening. However, we expect recent tightening of financial conditions and higher oil prices to slow growth in [H2 FY18] and hence see rates on hold after August. [The] RBI will need to consider tightening beyond this stage if oil prices move above $80/bbl sustainably, if the government embarks on populist policies ahead of elections that entail fiscal slippage, and if balance-of-payments pressures re-emerge.”
Author: Edward Gardner, Economist