The central bank’s April policy tone was dovish and it had actually lowered inflation forecasts for the first and second half of 2018-19.
RBI Monetary Policy → The six-member monetary policy committee (MPC) unanimously voted for a rate hike, citing the fear of inflation, partly flared by the recent spike in crude oil prices. The hike in policy repo rate to 6.25 per cent from 6 per cent was contrary to market expectation that the central bank will hold rates and the unanimous decision came as a surprise to the markets.
The central bank’s April policy tone was dovish and it had actually lowered inflation forecasts for the first and second half of 2018-19. On Wednesday, the inflation outlook was revised up once again.
With the hike in the June policy, the Reserve Bank of India (RBI) has reversed the rate cutting cycle it had engaged in since January 15, 2015. The last rate hike happened on January 28, 2014, when the repo rate was increased to 8 per cent. The last policy action was in August 2017, when the central bank had lowered the repo rate by 25 basis points (bps).
Even as the central bank kept its stance ‘neutral’, the bond market saw the policy statement as hawkish, expecting at least one more rate hike soon. The 10-year gilt yield, which had already factored in a 25-bp repo rate hike in rates, jumped 8 bps after the policy announcement. The 10-year gilt yield closed at 7.92 per cent, up from its previous close of 7.83 per cent.
Wednesday’s policy statement showed that the MPC was clearly concerned about rising prices, and, importantly, households’ expectations about the future course of prices. The May 2018 round of the RBI’s survey of households reported a significant rise in households’ inflation expectations of 90 bps and 130 bps, respectively, for three-month and one-year ahead horizons.
This “significant rise” in households’ expectations, “could feed into wages and input costs in the coming months”, the RBI’s policy statement noted.
Once again changing its inflation forecast, from 4.7-5.1 per cent for the first half and 4.4 per cent in the second half, to 4.8-4.9 per cent and 4.7 per cent, respectively, the RBI said it had not anticipated a 12 per cent rise ($66 to $74 a barrel) in the Indian basket of crude oil between the April and June policies.
Retail inflation rose sharply to 4.6 per cent in April from 4.3 per cent in March. Core inflation, which includes food and fuel, remained consistently high at 5.8 per cent in April, up from 5.23 per cent in March.
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