BENGALURU - The Reserve Bank of India on Wednesday raised interest rates for the second straight meeting, but retained its "neutral" stance as it aimed to contain inflation while not choking growth.
The RBI's Monetary Policy Committee (MPC) raised the repo rate by 25 basis points to 6.50 percent. It is the first time since October 2013 that the rate has been increased at consecutive policy meetings.
In June, the MPC also increased the key rate by 25 bps.
The rate action was in line with a Reuters poll last week, which showed 37 of 63 economists expecting a rate increase.
The reverse repo rate was also raised by 25 basis points to 6.25 percent.
KUNAL SHAH, SENIOR VP & FUND MANAGER, KOTAK MAHINDRA LIFE INSURANCE, MUMBAI
"The tone of policy statement is broadly neutral. I think what they have delivered is somewhat concluding the expected increase in inflation rather than the realised inflation because realised inflation has been running lower than forecast. So, maybe some expectation of MSP (minimum support price)-related increase in inflation, and they want to pre-emptively be cautious and deliver a rate hike, and that is what I think the market is expecting.
"Inflation continues to remain under control. Even today, the Reserve Bank of India has not revised its inflation forecast... I think even the RBI is comfortable with the projected inflation, but they are not comfortable with the unexpected rise in inflation... so they just gave a pre-emptive hike, otherwise they could have increased their inflation projections, which they have not done."
DHANANJAY SINHA, HEAD OF INSTITUTIONAL RESEARCH, EMKAY GLOBAL FINANCIAL SERVICES LTD, MUMBAI
"We were expecting rate hikes to happen, and the Reserve Bank of India seems to have taken a positive view on the growth momentum. I think the rate hike decision is fairly justified based on the assessment of various factors which influence inflation.
Also, we seem to be clearly following the core inflation trend which is on the rising side... which is good. The increase in commodity prices, the rupee depreciation, higher rural spending would all affect inflation.
The rupee depreciation has implications on inflation and liquidity in the money markets. However, right now, its impact on liquidity is larger and more relevant in terms of monetary policy decisions."
ANAGHA DEODHAR, ECONOMIST, ICICI SECURITIES, MUMBAI
"The hike was expected, but what is surprising is the stance has remained "neutral". We were expecting that since this is the second consecutive hike in two policies, the stance would be changed to "tightening".
They have not quantified the impact of MSP (minimum support prices) on inflation, or when MSP will start affecting inflation - whether it will be in October or earlier than that. I would have liked to see some clarity on that.
We are expecting at least one more hike this financial year.
I don't think rupee will be a key factor in the Reserve Bank of India's rate decision because they have repeatedly said they do not target any specific value of rupee - they just want to curb volatility.
The high-frequency indicators show that growth has been pretty good - we expect Q1 growth to be between 7.6 percent and 7.7 percent. With the implementation of MSP hike, I expect H2 inflation will be higher than the initial forecast."
SHASHANK MENDIRATTA, INDIA ECONOMIST, ANZ BANK, BANGALORE
"The tone of policy seems slightly on the hawkish side despite RBI tinkering only marginally with its second-half inflation projection. The RBI continues to reiterate long-standing risks to inflation and in particular oil prices remain a key risk.
HRA revision by the state government is another item on the RBI's radar. Another factor is MSP. A part of the MSP increase has already been incorporated by the RBI in June inflation projection, and the marginal increase in inflation projection this time is due to higher than historical revision in MSP.
The rupee will remain under pressure due to worsening domestic fundamentals and capital outflows.
The case for another hike is not off the table, there could be one in October."