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RBI hikes repo rate by 25 basis points to 6.5%

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Mumbai: The Reserve bank of India’s (RBI’s) monetary policy committee (MPC) on Wednesday raised repo rate by 25 basis points (bps) to 6.5% on account of inflationary pressures arising due to hikes in minimum support prices for the crop. The six-member committee voted to maintain a neutral policy stance, thus keeping its options open for further rate hikes. A majority of economists surveyed by Mint was expecting a second consecutive RBI rate hike in today’s policy.

The RBI also raised its average inflation projection for the second half of the year to 4.8% from the 4.7% it had projected in June. The central bank expects inflation to edge higher to 5% in the first quarter of the next fiscal year.

The policy statement also cited MSP hike as the primary factor stoking inflation this year. The government has fixed the MSP at 150% of the cost of production for all kharif crops. “This increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second round effects on headline inflation,” said RBI in its policy statement.

The central bank also highlighted its concerns over crude oil prices which remain elevated despite a slight moderation. It, however, remains sanguine about the performance of monsoon as it augurs well for food inflation in the medium-term.

On the growth outlook, RBI remains confident of strong economic activity supported by the monsoon, robust rural demand due to MSP hike and rising investment activity.

“The MPC notes that domestic economic activity has continued to sustain momentum and the output gap has virtually closed,” said the policy statement.

The rate-setting panel also cited as concerns uncertainty around domestic inflation and recent global developments. “Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity,” said the statement.

The decision of the MPC was not unanimous, unlike in the previous monetary policy review. Five out of six MPC members voted in favour of a rate hike with Ravindra Dholakia voting against the decision.(Agencies)

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