The Reserve Bank of India hiked repo rate by 25 basis points to 6.50 per cent for the second time in a row, as it announced the monetary policy on Wednesday. Consequently, the reverse repo rate has been adjusted to 6.25 per cent. The central regulator, however, kept its stance unchanged to neutral. After an increase in key interest rates, it is likely that your EMI may go up increasing your monthly outgo.

Repo rate is the rate at which the central bank lends money to other banks.

GDP growth projection for 2018-19 has been retained by the central regulator, as in the June statement at 7.4 per cent. GDP growth for Q1:2019-20 is projected at 7.5 per cent.

The rates have been hiked with an aim to achieve the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

After the last review in June, when the RBI hiked rates by 0.25 per cent, and data releases showing hardening in inflation, many analysts had voted for a rate hike.

The third Bi-monthly Monetary Policy Statement report states, “The inflation outlook is likely to be shaped by several factors. First, the central government has decided to fix the minimum support prices (MSPs) of at least 150 per cent of the cost of production for all kharif crops for the sowing season of 2018-19. This increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second round effects on headline inflation.”

Wholesale price-indexed (WPI) inflation shot up to a 4 year high during June at 5.77 per cent compared to 4.43 per cent in the previous month. The inflation has jumped on the back of higher petrol and diesel prices as international crude oil prices have risen by more than 20 per cent since the start of this financial year. The WPI inflation in June 2017 was at 0.90 per cent. Retail inflation also jumped to 5 per cent in June against 4.87 per cent recorded in May, according to monthly data released by the Central Statistics Office.

Many research reports suggested that the regulator may not change the key policy rate. One of the reports by Edelweiss Securities suggested that easing inflation and economic momentum do not suggest a need for policymakers to rush for another hike in the forthcoming review. The report said that though core inflation has peaked, it is expected to ease over next 12 months and even as economic activity has rebounded, it has improved only vis-a-vis demonetisation/GST-led disruptions.

Similarly, a report by HDFC Bank said, “We think it is too early to conclude that recovery is well entrenched. To that extent, there is hardly a case for rushing to normalise the monetary policy further,” it added. It is a “close call” for the Reserve Bank of India (RBI), but its rate-setting panel will go for a status quo on key policy rates at the August monetary policy review, a report by HDFC Bank said today.