Nothing neutral about August policy of Reserve Bank of India

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"RBI's Monetary Policy Committee has chose to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.5% Consequently, the reverse repo rate under the LAF stands adjusted to 6.25% and marginal standing facility rate and Bank Rate to 6.75%", the apex bank said in a statement.

The Reserve Bank of India (RBI) on Wednesday chose to increase the policy repo rate by 25 basis points to 6.5%.

"Consequently, the reverse repo rate under the LAF stands adjusted to 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent", the RBI said in its the third bi-monthly monetary policy statement.

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In June, the repo rate or the benchmark lending rate was raised for the first time in over four years, by 25 basis points to 6.25 percent.

"The RBI did not change its policy stance in June due to the various uncertainties they faced and the degree of uncertainty has gone up considerably compared to the last policy, so they would continue to retain the neutral stance", she said.

Five members of MPC - 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. This the first time since October 2013 that the central bank has hiked borrowing costs at two consecutive policy meetings.

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Following this move, the home loans, auto loans and EMIs are expected to become costlier as whenever RBI hikes the repo rate, the banks usually pass the interest burden on its customers. But in all respects, the central bank's policy statement was anything but neutral.

The decision of RBI's monetary policy committee, which was not a unanimous one, is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, the central bank said.

The repo rate is the rate at which the RBI lends money to commercial banks. It projected inflation at 4.8 per cent in the second half of 2018-19. Reports suggest that RBI has kept the GDP forecast for the current fiscal unchanged at 7.4%. Rising trade tensions, accelerating crude oil prices, slowing economic activity, rising retail inflation were the major reasons behind the hike in repo rate.

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