RBI monetary policy committee (MPC) unanimously decided to increase the benchmark repo rate for the first time in more than four years, in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 % within a band of +/- 2 %.
The rate changes after the MPC meet will be:
1. Under Liquidity adjustment Facility(LAF) decided to raise Repo rate by 25 bps to 6.25%,
2. The reverse repo rate under the LAF stands adjusted to 6.0 %, and
3. The marginal standing facility (MSF) rate and the Bank Rate to 6.50 %.
Stance: Neutral
A neutral stance provides the Reserve Bank of India enough leeway to change rates in either direction in the next MPC. RBI Governor Urjit Patel said, “The MPC felt there was enough uncertainty to stick to neutral stance and yet respond to the risks to inflation target that have emerged in the recent months.”
A Rate hike was expected, but many experts felt that RBI might wait till the next MPC meet to hike Rates. This rate hike is being treated by some as a pre-emptive strike to insulate from the event risk on inflation in the future.
The major factors taken into account by the committee on deciding for a Rate hike were:
1. Rising inflation concerns: The committee expects retail inflation at 4.8-4.9% in the first half of the year and at 4.7% in the second half of the year. Retail inflation, which is targeted was 4.58 % in the month of April, driven by a significant increase in inflation excluding food and fuel. 
(source: RBI)
(source: RBI)
2. Global Factors: Global trade growth has continued to strengthen, though geo-political tensions contributed recently to declining export orders. In Advanced Economies the Global economic activity has expanded albeit some momentum has been lost; Emerging Market Economies have generally been resilient. Oil prices increased for some period and the due to supply glut more or less stabilized.
3. US Rate Cuts: This has increased the pressure on the Indian Rupee. Also, bond yields have risen on reduced foreign appetite for Emerging Markets debt due to growing dollar shortage in the global market and on prospects of higher interest rates in Advanced Economies. Stocks in major EMEs have faced sell offs on a rising dollar.
4. Liquidity Surplus: During April, the Reserve Bank absorbed surplus liquidity of ₹496 billion on a daily net average basis due to increased government spending, especially in the second half of the month.
5. Rural Demand: Improved rural demand on the back of a bumper harvest and the government’s thrust on rural housing and infrastructure. The monsoon forecast augurs well for the agricultural sector. According to RBI, October seems more likely by which better information about the impact of the MSPs on food prices can be gauged. As forecast by the IMD, if the monsoon is normal and well-distributed temporally and spatially, it may help keep food inflation in check.
