RBI hikes repo rate by 25 basis points to 6.25%

RBI hikes repo rate by 25 basis points to 6.25%

News:

1. The RBI raises repo rate as international crude oil price surges.

Important facts:

2. The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) increased the repo rate by 25 basis points to 6.25%.

3. The last hike was in January 2014.

Reasons for increased in repo rate:

Hardening inflation trends.

4. A firming up of growth recovery at home.

5. Global uncertainties affecting emerging markets.

6. The rupee, along with other emerging market currencies, is hurting too.

7. Crude oil prices have been the biggest factor at play, rising 12% from $66 a barrel when the MPC met in April to $74 a barrel.

RBI’s Inflation projection:

8. The RBI increased its inflation projection to 4.8% -4.9% in the first half (H1) of the financial year and 4.7% in the second half, as compared with 4.7-5.1% in H1 and 4.4% for H2.

9. The Apex bank said, the Indian crude basket surged to $74 a barrel from $66 since the last policy meeting in April.

10. Consumer price index-based inflation, or retail inflation, rose to 4.6% in April from 4.28% in March.

11. While the central bank has increased the inflation projection, it has maintained the ‘neutral’ stance for monetary policy.

GDP growth projection:

12. The outlook for GDP growth for 2018-19 has been retained at 7.4% as projected in the April Policy.

13. GDP growth is projected to be in the range of 7.5-7.6% in H1 and 7.3-7.4% in H2, with risks with risk evenly balanced.

Possible consequences:

14. As inflationary trends harden, the RBI’s rate hike will quell uncertainty in the markets.

15. Important terminology related to this article:

1-      REPO RATE:

  • Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.
  • Repo rate is used by monetary authorities to control inflation.

2-      CONSUMER PRICE INDEX:

  • The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.
  • It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.
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