Published: Thu, August 02, 2018
Money | By Ralph Mccoy

Indian central bank raises rates for second time


On Wednesday, Union Bank of India raised its one-year MCLR by 10 basis points to 8.55 per cent while Kotak Mahindra Bank raised its one-month and three-month rates by 5 basis points to 8.20 per cent and 8.55 per cent, respectively.

Of the total six members of the MPC, five members - Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral V Acharya and Urjit R Patel - voted in favour of the decision, while Ravindra H Dholakia voted against the decision to increase the repo rate. "The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis", it said.

We believe that the March 2019 print will be a tad higher than the RBI's own estimate of 4.8 percent even as we continue to remain concerned about possible upside risks from Minimum Support Prices (MSP) implementation, state House Rent Allowances (HRA) hikes, possible fiscal slippages and elevated core inflation, especially for services.

Banks have been on a rate increasing spree after the central bank raised its repo rate in June this year after a gap of four years.

It also fleshed out its thinking on how far it is likely to go with its planned rate hikes by publishing a new long-term forecast for what it called Britain's trend real interest rate, or "R*", of zero to 1 percent, more than 2 percentage points below its pre-financial crisis level.

We think this decision will score well with domestic investors as well as reemphasise the inflation fighting credentials of the central bank in the eyes of the global community.

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In its third bi-monthly policy review, the central bank kept the GDP forecast for the current fiscal unchanged at 7.4 per cent and saw it at 7.5-7.6 per cent in the second half of the current fiscal.

Reports suggest that it is for the second time that the RBI has increased the interest rates by 0.25%. It projected inflation at 4.8 per cent in the second half of 2018-19.

Inflation has remained above target for 17 consecutive months, with the Bank today upgrading its predictions on consumer price index (CPI) inflation.

The Bank sees continuing "modest" economic growth of 1.4% this year and an increase to 1.8% next year.

Add to this mix sticky and rising core inflation and there is a ideal recipe for a rate hike. RBI has sounded sanguine on growth pointing to the rise in bank credit, robust commercial vehicle sales and improving construction activity.

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