RBI in a tight spot, is expected to raise rates again

RBI governor Urjit Patel. Some economists say RBI could revise upward its inflation target for the second half of the year

The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) has chose to increase the repo rate by 25 basis points to 6.5% due to inflation concerns.

Inflation has been rising steeply, as it peaked at 5% in June, especially in the backdrop of a weak rupee and higher oil prices, India's primary import commodity. For instance, every time the RBI lowers repo rate, banks are typically expected to pass on the benefit to retail customers.

Thirty-seven of 63 economists in a Reuters poll last week said the RBI will raise rates n Wednesday, while 22 said the next hike would come later this year, or early in 2019.

The rate at which the RBI borrows money from commercial banks stands adjusted to 6.25%.

"Construction activity indicators also improved with cement production sustaining double digit growth for the eighth consecutive month in June. Steel consumption also accelerated in May", the central bank said in a media release. It projected inflation at 4.8 per cent in the second half of 2018-19.

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Another interest rate hike is on the cards in India as the central bank tries to rein in inflation and shore up Asia's weakest major currency.

Among the Monetary Policy Committee panel members, Dr Chetan Ghate, Dr Pami Dua, Dr Michael Debabrata Patra, Dr Viral V Acharya and Dr Urjit R Patel voted in favour of the decision while Dr. Ravindra H Dholakia voted against the decision.

Still, a sizable numbers of analysts and market participants believe the RBI could hold off and not hike interest rates, noting that the recovery is nascent and bank credit to corporates is not yet free flowing.

"The RBI did not change its policy stance in June due to the various uncertainties they faced and the degree of uncertainty has gone up considerably compared to the last policy, so they would continue to retain the neutral stance", she said. Apart from the repo rate, reverse repo rate has also been hiked by 0.25% to 6.25%. "The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis", it said.

RBI had increased rate by 25 bps in the previous policy review after four-and-a-half years.

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