The second 25 bps rate hike in as many months is to ensure that the Reserve Bank doesn’t drift away from its 4-per cent inflation mandate and keeps moving towards the target on sustainable basis, RBI Governor Urjit Patel has said.
Listing out a rash of headwinds — higher risks to inflation driven by domestic and external factors, trade wars which are slipping into a “currency war now”, uneven global growth and spiralling crude prices — RBI hiked the short-term policy rates or repo rate by a quarter of a percentage point to 6.5 per cent, reported PTI.
RBI bit the bullet for the first time since January 28, 2014 — when rates were hiked to 8 per cent — during the June 6 policy this year by hiking rate to 6.25 per cent from 6, the report said.
In the subsequent years, it had cut the rates on six occasions. In its last revision, on August 2, 2017, rates were cut by 25 basis points to 6 per cent, it added.
The over-5-page policy statement reportedly said however that almost all these headwinds are “evenly balanced”. It even marginally revised downwards the central bank’s as well as the Monetary Policy Committee’s (MPC) inflation forecast for the first half of 2018-19.
SBI chairman Rajnish Kumar was quoted as saying that the move “is a clear desire to frontload the rate hike cycle. Simultaneously, the decision to keep the stance in neutral mode indicates RBI willingness to be flexible and accommodative with global growth continuing to be uncertain.”
Patel noted that for several months headline inflation has breached the 4 per cent target and that it’s high time that the Parliamentary mandate is achieved on a durable basis.
He told reporters at the customary post-policy presser that “the main reason for changing the policy rate is to ensure that on a durable basis we come to and maintain the 4 per cent target”.
“We have been away from the 4 per cent number for a several months now and we took two steps — in June and in August — to maximise our chances that we don’t drift away from 4 per cent and in fact we move towards 4 per cent on a durable basis,” a PTI report quoted him as saying.
Defending his neutral stance despite the hikes, Patel reportedly said: “So, it is based on the objective that has been given to us, data prints and our projections going forward.”
RBI reiterated that it will strive to support growth and tie headline inflation down at the 4 per cent mandate with 2 per cent aberrations both sides.