RBI hikes key rate, keeps stance ‘neutral’

 The Reserve Bank of India (RBI) on Wednesday raised its policy rate for the first time in over four years, due to inflation concerns, and it surprised some analysts by keeping its policy stance as “neutral”.

The RBI’s monetary policy committee lifted the repo rate by 25 basis points to 6.25 percent. This is the first change since a 25 bps cut in August 2017.

The hike, the first since January 2014, was predicted by 46 percent of respondents in a Reuters poll this week.

The reverse repo rate was increased by 25 basis points to 6.00 percent.

All six members on the policy panel voted for a rate hike.

Capital Economics said it believes Wednesday’s decision “marks the start of a modest tightening cycle over the coming months”.

In a statement, the RBI said it “reiterates its commitment to achieving the medium-term target for headline inflation of 4 percent on a durable basis”.

Due to inflation concerns, some analysts had expected the RBI to switch its stance to “tighten” on Wednesday.

Inflation worries have risen following a steep increase in global oil prices and a weakening rupee, plus a potential rise in consumer spending as India’s economy expanded at a robust 7.7 percent annual pace in January-March quarter.

The RBI on Wednesday also raised its inflation projection for the second-half of fiscal 2018-19 to 4.7 percent from an earlier projection of 4.4 percent.

Annual consumer inflation was 4.58 percent in April, the sixth straight month it topped the RBI’s medium-term 4 percent target.

The 10-year benchmark bond yield rose 4 basis points to 7.87 percent after the monetary policy announcement while the rupee was at 66.97 to the dollar from 67.05 before the news.

The main stock market index pared gains after the central bank’s announcement.

India’s central bank becomes the latest in Asia to increase rates recently, to battle inflationary pressures or support its currency.

In May, the Philippines and Indonesia lifted their benchmark rates for the first time since 2014. In March, China raised a key short-term rate following a Federal Reserve’s rate hike.

India’s rate decision comes one week before a Fed policy meeting that’s widely expected to raise U.S. interest rates.