Summary: The Monetary Policy Committee (MPC), in its third session of the year, voted to raise the repo rate by 25 bps again. The back to back hike is because of inflationary pressure though the economic outlook continues to look good..

Given the existing market conditions and the likelihood of inflation, the RBI has made the decision to hike the repo rate by 25 basis points. This back to back hike by Monetary Policy Committee (MPC) this year is the first such case since October 2013. This is the third meeting of the MPC this year.

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.

The rate currently stands at 6.50 per cent. The policy stance remained neutral at the meeting today. Inflation was cited as a major issue for the raising of the rates last time and with inflation reaching a recent high in June because of higher cost fuels, it is a desire to manage the pressures of inflation that has compelled the RBI to raise rates this time around.

The MPC stated in its outlook released after the meeting: “Uncertainty around domestic inflation needs to be carefully monitored in the coming months. In addition, recent global developments raise some concerns. Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity. Geopolitical tensions and elevated oil prices continue to be the other sources of risk to global growth."

"Growth remains on a stronger footing, implying that the output gap is fast closing and can lead to inflationary pressures in medium term," opined Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, an expert observer of the issue.