Inflation may be under control
In its second bi-monthly monetary policy committee (MPC) meeting of financial year 2018-19, RBI on Wednesday decided to raise the repo rate by 25 basis points to 6.25 per cent. The reverse repo rate has also been raised by 25 basis points to 6 per cent. Keeping a neutral stance on the monetary policy, the MPC maintained its decision to hike the benchmark rates is in line with the objective to achieve 4 per cent (+/-2 per cent) retail inflation in the medium term. In its April policy meet, the MPC had decided to hold the repo rate at 6 per cent. This is the first time that RBI has hiked the repo rate since January 2014. RBI Governor Urjit Patel said the decision to hike the repo rate was taken in view of rising crude oil prices and HRA revision by various states that have pushed inflation up. Repo rate is the rate at which RBI lends money to banks. However, RBI retained the GDP growth for the financial year 2018-19 at 7.4 per cent. The RBI had last hiked the rates in January 2014. Since then, it has either reduced it or maintained status quo. Repo rate is an important tool to control inflationary trends. A higher repo rate will make borrowing expensive for banks, which in turn may charge higher interest rates on loans given to customers. Effective from June 1, leading banks SBI, PNB, and ICICI have already hiked their lending rates. The hike in repo rate which in turn will make the borrowings more expensive is likely to control the inflationary trends triggered by higher oil prices. A higher inflation rate is likely to affect the steady growth of the GDP, which grew by 7.7 per cent in the January-March quarter of 2017-18. As the major economic indicators suggest that the economy is on track and does not face any serious challenge, the rising fuel prices have the potential to seriously impact the steady and satisfactory growth of the GDP. The rising fuel prices can lead to an overall rise in prices across commodities and can shoot up the inflation. The hike in interest rates by banks could lead to slowing of the consumer demand and can offset the impact of higher oil prices on inflation. Since it last hiked the rates in January 2014, RBI had either reduced the repo rate or maintained a status quo. This helped the banks reduce their rates, which in turn meant that the capital and financial markets had enough cash to lend on lower rates. This policy was followed with a view to helping the businesses procure loans on lower rates and easy terms and help grow the economy, which grew satisfactorily by 6.8 per cent in 2017-18 and is pegged at growing by 7.5 per cent in 2018-19. A majority of the economists in a survey conducted by Bloomberg had forecast that RBI would hold the key rates. Though their forecast did not come true, they had argued that RBI is unlikely to hike the repo rate in view of the government's unwavering commitment to economic growth. As the government would not like the oil prices to play the spoilsport in an otherwise positive economic environment, even the RBI has realised that the side-effects of rising oil prices need to be addressed before it could seriously impact the economy.
As crucial elections are around the corner, the government can ill-afford to antagonise the people by not doing anything if the rising oil prices trigger a simultaneous rise in the prices of other commodities. Prime Minister Narendra Modi's government has benefitted a great deal from the conducive economic environment that prevailed in the last four years. During this period, the international oil prices hit a low and farm output was as per the target, thanks to a normal monsoon. Now that he is going to seek a fresh mandate from the people in the next year's Lok Sabha election, he is likely to stress that during his rule, the economy was successfully brought back on track, making the country world's fastest-growing major economy. But in a country where tomato and onion prices decide the fate of elections, the rising oil prices in an election year is a serious problem for the government as it has the potential to drive the prices up of most commodities. RBI decision to hike the repo rate by 25 basis points is a timely intervention to keep the inflation under control.