Mumbai: RBI on Wednesday hiked the key rate for the first time in over four years - by 0.25 percent -to curb inflationary pressure from high oil prices, a move which will translate into higher EMIs for home, auto and other loans.
With all its members voting for the increase, the 6-member Monetary Policy Committee (MPC) surprised markets by raising the repo rate, at which it lends to other banks, to 6.25 percent but kept its policy stance as "neutral".
The reverse repo rate, at which it borrows from banks, was also raised by a similar proportion to 6 percent.
This is the first increase in interest rate since January 28, 2014, when rates were hiked by a similar proportion to 8 percent.
In the subsequent years, RBI cut the interest rate on six occasions. In its last revision, on August 2, 2017, rates were reduced by 25 basis points to 6 percent.
In the second bi-monthly monetary policy of the 2018-19, RBI saw a significant upside to inflation from higher oil prices but kept its GDP growth outlook unchanged at 7.4 percent for the financial year. Consumer Price Index (CPI) based retail inflation was projected at 4.6 per cent for the April-September period and 4.7 percent in second half of 2018-19 fiscal.
Anticipating firming of interest rate, several banks including SBI, ICICI and Bank of Baroda had in last one week raised lending rates by up to 0.1 per cent.
The MPC, headed by RBI Governor Urjit Patel, said it decided to increase the policy repo rate by 25 basis points and keep the stance neutral.
RBI's decision to hike repo rate was guided by a sharp spike in retail inflation which rose sharply to 4.6 percent in April. Some experts, however, feel that the hike is positive for "savers".
The decision took many by surprise because most experts were expecting it to take a hawkish stance in the June policy review and to go for a rate hike only in August.
Immediately after the announcement, the S&P BSE Sensex was trading 222.81 points or 0.64 percent higher at 35,126.02 while the broader Nifty50 of the National Stock Exchange traded at 10,646.05, with a gain of 52.90 points or 0.50 percent. The banking stocks turned negative as the Nifty Bank index lost 0.14 percent.
RBI retained the GDP growth forecast for 2018-19 at 7.4 percent.