The six-member monetary policy committee of the Reserve Bank of India (RBI) has decided to increase the key policy rate or the repo rate by 25 basis points to 6.25% for the first time in four and a half years and the first time since BJP came into power. The central bank’s inflation outlook worsened due to a rise in crude oil prices.
The repo hike would translate into an increase in bank’s key lending rates such as the home loan and auto loans, but is good news for investors who deal in instruments like fixed deposits, especially the senior citizens, who primarily depend on these deposits to meet their regular income requirements. Many banks offer a 0.25-0.5% higher interest rate to senior citizens. After the repo rate hike, it can touch 8% after a long gap.
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“Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook — both on the upside and the downside,” RBI said. The Indian crude basket rose 12% last month which was sharper and earlier than expected, the central bank. The price of Indian basket of crude surged from $66 a barrel to $74, since the MPC’s last meeting in early April.
Consumer price-index-based inflation or retail inflation rose sharply to 4.6% in April. RBI projected CPI inflation at 4.6% in the first half of the year and 4.7% in in the second.
RBI has retained GDP growth for 2018-19 at 7.4% as projected in the April policy.