The Reserve Bank for the first time in four-and-half-years raised key interest rate today by 25 basis points to 6.25 % on inflation concerns arising from surge in worldwide oil prices. The move was predicted by 14 of the 44 economists in a Bloomberg survey, with the rest seeing no change. The reverse repo rate has been adjusted to 6 per cent.
"If the current trend of increasing inflation and oil prices continues, we expect another 25 bps hike somewhere during this fiscal year", said Sudhakar Pattabiraman, head of research operations at research firm William O'Neil.
Overall inflation rose from 3.9% to 4.2% between March and April, while retail price inflation jumped to 4.6%. The RBI said that the increase in repo rate happened under the liquidity adjustment facility (LAF). The lending rates are likely to go further up.
The Reserve Bank of India's monetary policy committee (MPC) sounded optimistic on investment and noted that consumption demand remains strong in the Indian economy.
The increase in both retail and wholesale inflation was higher than expected in the month of April. While petrol in Delhi now costs Rs 77.72 a litre, diesel is at Rs 68.80 per litre.
Anticipating a hike of the interest rate, several major lenders including SBI, PNB and ICICI Bank had already raised their lending rates from June 1.
RBI retained its Gross Domestic Product (GDP) growth projection for the financial year at 7.4 per cent.
The neutral stance is not contradictory to the rate hike, but such a stance leaves all options open on the table for the MPC, Patel said in a media briefing. "While the summer momentum in vegetable prices was weaker than the usual pattern, there was an abrupt acceleration in CPI (consumer price index) inflation excluding food and fuel", the RBI statement said.
Singh of Taurus Mutual Fund said the decision on interest rate hike was generally expected ever since the release of the minutes of last monetary policy committee meeting, which indicated that the members were leaning towards a rate hike.
The April policy RBI had projected CPI inflation for 2018-19 to be at 4.7-5.1 per cent in first half and 4.4 per cent in second half, which included the HR impact for central government employees.
"The interest rate hike will have some sentiment-related impact on the sector.it will have more impact on the commercial vehicle segment but on the other segment the impact should not be that significant", believes Subrata Ray, senior group vice president, ICRA. "Given the global conditions - rising oil prices, the Fed's rate policy and the fact that other emerging markets have already begun raising rates - RBI should have probably raised rates earlier".