On Wednesday, Due to hike in minimum support price, Reserve Bank of India monetary policy committee(MPC) raised policy rates by 25 basis points to 6.5% on account of inflationary pressures arise.

The 6 member committee voted to keep its policy stance neutral, keeping its options open for further rate hikes. In today’s monetary policy,  the majority of experts surveyed and expecting a second consecutive rate hike.

RBI also raised the average inflation projection for the second half of the year to 4.8% from 4.7% in June. The central bank expects inflation to edge higher to 5% in the first quarter of the next fiscal year.

The policy statement also justifies the implementation of minimum support price(MSP) hike as the key factor stoking inflation this year. The government has fixed the MSP at 150% of the cost of production of all Kharif crops.

According to the statement of RBI in its Policy,“This increase in MSPs for Kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second-round effects on headline inflation”.

RBI also focuses its concerns over crude oil prices as it remains high despite seeing a slight restraint.

However, RBI remains optimistic about the overall performance of monsoon as it signs good and well for food inflation in the medium-term. In support of monsoon, RBI remains confident of a strong economic activity in respect of growth outlook.

The policy statement further added, “The MPC notes that domestic economic activity has continued to sustain momentum and the output gap has virtually closed”.

The MPC also justifies on the statement that uncertainty around domestic inflation and recent global developments as concerns going forward.

As per the Statement said,”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,”

Unlike the previous policy, the decision of the MPC was not the same view. 5 out of 6 MPC members voted in favor of a rate hike with Dr.Ravindra Dholakia voting against the decision.The minutes of the MPC’s meeting will be published by August 16, 2018.

Meanwhile, economists have voiced their concern as the trade war rhetoric hots up again.

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