In its second bi-monthly monetary policy of 2018-19, the Reserve Bank of India (RBI) on Wednesday raised the repo rate by 25 basis points to 6.25% and reverse repo to 6% from 5.75%.

The resolution of the Monetary Policy Committee (MPC) to hike key rates for the first time in over four years, comes due to inflation concerns, and risks associated with the Indian economy.

The central bank has highlighted five risks to India's economy in its monetary policy, which can derail the country's high growth.

As usual, the main culprit remains crude oil prices. The MPC said there has been a 12% increase in the price of Indian crude basket, which was sharper, earlier than expected and seems to be durable.

"Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook – both on the upside and the downside," the MPC said.

The five risks the economy faces this year, according to the RBI:

First, global financial market developments have emerged as another important source of uncertainty.

Second, the significant rise in households’ inflation expectations as gathered in the May 2018 round of the RBI’s survey could feed into wages and input costs in the coming months. However, the pass-through to output prices remains muted presently.

Third, the staggered impact of house rent allowance (HRA) revisions by various state governments may push headline inflation up. While the statistical impact of HRA revisions will be looked through, there is a need to watch out for any second round impact on inflation.

Fourth, the impact of the revision in the Minimum Support Price (MSP) formula for kharif crops is not possible to assess at this stage in the absence of adequate details.

Fifth, as forecast by the India Meteorological Department (IMD), if the monsoon is normal and well-distributed temporally and spatially, it may help keep food inflation benign.

These five risks made the MPC to hike key rates today to achieve the medium-term target for headline inflation of 4% on a durable basis.

Read our full coverage of the RBI Monetary Policy here

First Published:Jun 6, 2018 4:48 PM IST