India’s central bank lifts policy repo rate to 6.25%

June 6, 2018

NEW DELHI - In a unanimous vote, the Reserve Bank of India (RBI) today raised its policy repo rate by 25 bps to 6.25% . In its decision, the RBI considered the sharp rise in non-food and fuel inflation in April, higher oil prices and higher inflation expectations.

The RBI also revised higher its inflation forecast for F20Y19 (fiscal year ending March 2019).

In a research note, ANZ Bank says it believes today’s rate hike will not be sufficient to quell the inflationary pressures. “We expect a second hike of 25bps in August 2018.”

The RBI referred to three developments: (1) the 80bps m/m rise in non-food and fuel inflation in April; (2) the rise in the Indian basket of crude oil from USD66 per barrel to USD74 per barrel since the previous review in April alongside a hardening of non-oil commodity prices; and (3) a shift higher in household inflation expectations.

According to the central bank, the rise in non-food and fuel inflation has imparted persistence into higher CPI projections for FY2019.

Meanwhile inflation expectations have increased by 90bps for the three-month and 130bps for the one-year horizons in the May survey.  (ATI).