The deliberations of the Reserve Bank of India's Monetary Policy Committee (MPC) will end today and the verdict is eagerly awaited.
Another member Michael Patra had voted for a hike in repo rate but was overruled by majority that opted to hold rates steady at 6 per cent.
The April policy RBI had projected CPI inflation for 2018-19 to be at 4.7-5.1 per cent in first half and 4.4 per cent in second half, which included the HR impact for central government employees. This time, all the members of RBI's MPC voted in favour of a rate hike.
"The recent hike in crude prices and better GDP for the last quarter of FY18 suggest inflation trajectory may be on the higher side".
The repo rate is the rate at which the RBI lends short-term money to the banks.
The Reserve Bank Governor Urjit Patel, in a media briefing, said that the rates have been hiked after "a prolonged pause".
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In a snap poll of 56 economists taken after gross domestic product data on Thursday, 26 of those respondents, or about 46 percent, expect the RBI to take the repo rate higher at the 6 June meeting.
Radhika Rao, India Economist with DBS Group, for one, expects a hike in the short-term lending rate in June itself. "But a surge in core inflation, looser fiscal policy and rising oil prices are a concern for the MPC (Monetary Policy Committee)", noted Shilan Shah, senior India economist at Capital Economics, who predicts a June hike.
After falling for three consecutive months, retail inflation in April rose to 4.58 per cent, wholesale inflation stood at 3.18 per cent which was four month high in April. Reversing the declining trend of three months, retail inflation inched up to 4.58 per cent in April. While petrol in Delhi now costs Rs 77.72 a litre, diesel is at Rs 68.80 per litre.
At a press conference, Patel said RBI will remain cautious and vigilant on managing the risks to growth and inflation.
Others hope that the MPC will continue to maintain status quo for longer. "Given the global conditions - rising oil prices, the Fed's rate policy and the fact that other emerging markets have already begun raising rates - RBI should have probably raised rates earlier".
A rate hike complicates the growth outlook in an economy that's showing early signs of an uneven recovery. But the country's largest lender - along with Punjab National Bank and ICICI Bank - has already raised their lending rates from June 1, signalling hardening of the interest rate scenario. The lending rates are likely to go further up.