RBI hikes repo rates by 25 basis points

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The Reserve Bank of India (RBI) on Wednesday chose to increase the policy repo rate by 25 basis points to 6.5%.

Meanwhile, reverse repo, the rate at which the central bank borrows money from commercial banks within the country, was adjusted to 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.

Traders said though the market was largely prepared for a rate hike on Wednesday, yields would still shoot up by 5-10 basis points after one, and the surge would be much more if the RBI also tightens its stance.

The CNBC-TV18 poll had suggested a close call in the decision to raise or pause the key policy rates. All kinds of loans whether it is personal, auto or mortgage will be impacted by this hike.

The hike in interest rate is in line with the predictions made by the analysts. The last time, the central bank had effected a consecutive raise was in October 2013.

Five members of MPC - Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral V Acharya and Urjit R Patel voted in favour of the decision while Ravindra H Dholakia voted against the decision. Rising trade tensions, accelerating crude oil prices, slowing economic activity, rising retail inflation were the major reasons behind the hike in repo rate.

The monetary policy committee "could afford to do a "wait and watch" at this juncture and consider more data points before a rate action", said Lakshmi Iyer, Kotak Mutual Fund's chief investment officer debt.

In June, the RBI had raised the repo rate by 0.25 percent to 6.25 percent.

Worth mentioning here is that retail inflation, which is factored in by the MPC, soared to a five-month high of 5 per cent in June on elevated fuel price. Apart from the repo rate, reverse repo rate has also been hiked by 0.25% to 6.25%.

In the second bi-monthly resolution of 2018-19, it had projected CPI inflation for 2018-19 at 4.8-4.9 per cent in the first half of the financial year and at 4.7 per cent in the second half of the fiscal.