The RBI’s decision to raise benchmark rates spotlights concerns about inflation
The decision by the Reserve Bank of India’s Monetary Policy Committee to raise benchmark interest rates again by 25 basis points is a prudent one. This is the second successive rate increase in as many months, a response to mounting uncertainties on the inflation front. Continuing volatility in crude oil prices, the recent softening notwithstanding, and its vulnerability to geopolitical tensions and supply disruptions is one of the main risks to the inflation outlook.
The portents could not be clearer. With retail inflation having accelerated to 5% in June, the RBI has revised its projection for CPI inflation in the second half of the current fiscal year to 4.8%, from the June forecast of 4.7%, and now sees price gains accelerating to 5% in the April-June quarter of 2019. Policymakers on the MPC have understandably spotlighted the risks to the domestic economic rebound from global developments.