And this is unlikely to be the last rate hike from the central bank as oil and food prices push up inflation. The reverse repo rate has also been raised by 25 basis points to 6%. However, rather than wait for the threat of inflation to become clear, the panel advanced its action to proactively tame inflation.
According to Naresh Takkar, MD & Group CEO, ICRA Ltd, "Although the headline and the core CPI inflation for April 2018 revealed negative surprises, an immediate rate hike may be premature, given the lack of clarity on factors like the 2018 monsoons, the minimum support price (MSPs) and fiscal risks".
Annual consumer inflation was 4.58 per cent in April, the sixth straight month it topped the RBI's medium-term 4 per cent target. The weighted average call money rate, which is a good indicator of short-term liquidity and interest rate in the economy, came down to 5.88% on June 6 from 5.89% recorded on the previous day. "However it looks like that RBI taking note of both the domestic inflation and inflationary build up in combination with US Fed's stance with respect to unwinding of its balance sheet and guidance on fed rates, chose to go for an increase in the repo rate rather than waiting for more data and monsoon progress.", said Devendra Pant, chief economist, India Ratings and Research. Other central banks do the same.
Rakesh Srivastava, Director, sales & marketing, Hyundai Motor India said, "This increase will have a marginal impact on the cost of ownership but coupled with increased fuel prices and overall inflation could have profound affect".
"Debt market opened weaker amid overnight turmoil in emerging markets and high crude oil prices", said Naveen Singh, head of government securities trading at ICICI Securities Primary Dealership.
India imports almost 80 per cent of its oil, making it highly vulnerable to the increasing cost of crude.
The rising oil prices have raised inflation expectations. The policy statement further notes a pick-up in domestic investment in the last quarter, and the central bank expects it to continue.
Rajnish Kumar, chairman of State Bank of India (SBI), said, "The lending rates and deposit rates are likely to rise but we have just revised our rates last week so until the asset liability committee (ALCO) meets at the end of this month, there will be no change in our rates".
The MPC arrived at the unanimous decision as the outlook for inflation had become "uncertain" following a surge in worldwide crude oil prices. CPI inflation was at 2.99 percent in April a year ago.
India posted stellar 7.7 annual per cent growth for the quarter ended March 31. The central bank on Wednesday projected inflation for the 2018-'19 financial year at 4.8 to 4.9% in the first half and 4.7% in the second half of the year.
The May 2018 round of the Reserve Banks survey of households reported a significant rise in households inflation expectations of 90 basis points (bps) and 130 bps, respectively, for three-month and one-year ahead horizons, RBI said in its second bi-monthly monetary policy statement.
The RBI has increased loan eligibility from Rs 28 lakh to Rs 35 lakh for those buying houses under the government's affordable housing scheme in metros.