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Last updated: 12 Jun, 2018  

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Bikky Khosla | 12 Jun, 2018

The Reserve Bank of India (RBI) last week increased the repo rate by 25 basis points to 6.25 percent. This is the first rate hike since the NDA government came to power in May 2014. The decision by the six-member monetary policy committee (MPC) of the central bank came as a big surprise. The broader market expectation was that rates would be held this time while the stance may me revised from 'neutral' to 'tighten'. Instead, RBI went for a rate hike, retaining the 'neutral' stance.

The unanimous rate-hike decision by the MPC was clearly in the background of upside risk to inflation projections. Retail inflation was pegged at 4.8-4.9 percent for April-September of 2018-19 and 4.7 percent for the second half. Additionally, fresh indication on the robustness of domestic growth revival seem to be another major factor behind this decision, with the central bank now projecting GDP growth in the range of 7.5-7.6 percent in the first half and 7.3-7.4 percent in the second half, with risks evenly balanced.

Industry reaction to the decision seems mixed, with some sections viewing that the decision was based on the ground realities and positive sentiments in the economy. Reforms like GST, Bankruptcy Code and RERA have already paved a smooth way for the economy and now the RBI stance would boost the animal spirits of the industry. Also, the forecast of monsoon is very healthy and if food prices ease, the central bank would be able to revert to their benign stance on interest rates. However, the concern of high interest rates is raised by some sections.

Meanwhile, in a welcome decision RBI has eased loan-repayment norms for the micro, small and medium (MSME) sector. Under the relaxed norms, eligible MSME accounts, which were standard as on August 31, 2017, shall continue to be classified as standard by banks and NBFCs "if the payments due as on September 1, 2017 and falling due thereafter up to December 31, 2018 were/are paid not later than 180 days from their original due date. This is a welcome decision, which will give a big relief to MSMEs that have been affected due to implementation of the GST.

I invite your opinions.

 
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