The second rate hike on the trot suggests that for the central bank controlling inflation is a priority above even growth. The RBI raised repo rate by 25 basis points on Wednesday, the second since June, making it 6.5 percent. Caution on inflation seemed to be the key for the six-member monetary policy committee which voted five to one for raising the rate by 25 basis points yet again. Since the RBI is mandated to keep inflation in check, the MPC aimed to hold it at four percent.
Given the volatility in the global and domestic markets, the stance was unexceptionable. Middle class might be asked to pay a little more for house and auto loans. Some private banks were quick to raise lending rates within hours of the latest rate hike announced by the central bank. Uncertain global conditions with the fear of a full-scale trade war thanks to the tariffs slapped by President Trump on imports from China and a few other countries and the retaliatory steps taken by the targeted countries were a cause of worry. Also worrying was the rising global crude prices. Domestically too the MPC had good reason to be wary on the inflation front. While industrial production had slipped in May, overall the economy was picking up steam. The adverse effects of the GST and demonetisation disruptions were behind us and though the credit off-take by the industry was slow, in recent months fresh project finance had noticeably found renewed traction.
More importantly, a couple of major domestic factors which could prove inflationary were the much higher minimum support prices announced by the government for the kharif crops which could push up food prices. Also, it being the election year, populist measures could distort the fiscal position, resulting in higher inflation. Governments do tend to spend more than usual in an election year. Key States like Rajasthan, Madhya Pradesh and Chhattisgarh are set to elect new Assemblies before the general election next year, therefore, the cautionary note struck by the RBI was fully justified. In fact, despite the ‘neutral’ stance the RBI Governor Urjit Patel announced after the MPC meeting, another rate hike ahead of the general election cannot be completely ruled out. Patel was hopeful of containing inflation within the four percent target. Signs of the economy picking up were there in improved foreign direct investment, slower outgo of foreign funds from the equity markets and a better capacity utilisation in the manufacturing sector. Notably, the economy had absorbed the impact of the US Fed tapering.
