India raises key rate for first time since 2014, retains 'neutral' stance

By Suvashree Choudhury and Swati Bhat

MUMBAI (Reuters) - Growing inflation concerns prompted India's central bank to raise its policy rate for the first time in over four years on Wednesday, but it surprised some economists by keeping its stance "neutral" instead of changing to "tighten".

The Reserve Bank of India's Monetary Policy Committee (MPC) lifted the repo rate by 25 basis points to 6.25 percent - the first rate change since a 25 basis point cut in August 2017.

The committee "felt that there was enough uncertainty for us to keep to the neutral stance and yet respond to the risks to (the) inflation target that have emerged in recent months," RBI Governor Urjit Patel told reporters.

Inflation worries have risen due to a steep spike in global oil prices and a weakening rupee , plus a potential rise in consumer spending as India's economy expanded at a robust 7.7 percent annual pace in the January-March quarter.

"With growth strengthening and core inflation picking up, we think today's hike marks the start of a modest tightening cycle," said Shilan Shah, the senior India economist at Capital Economics.

Following the rate decision, India's 10-year benchmark bond yields rose to 7.93 percent - the highest levels since May 17 - from 7.83 percent before the policy statement. The rupee rose to 66.95 to the dollar from 67.05 prior to the announcement.

India's main stock market index (NSEI) added to its gains on Wednesday, as shares of state-run lenders rose after the RBI extended a move to let them spread their bond trading losses, which should ease pressure on those laden with bad debt.

The index, up 0.6 percent before the RBI statement, ended 0.9 percent ahead.

HIGHER INFLATION SEEN

The RBI on Wednesday raised its inflation projection for the second-half of fiscal 2018-19, which ends in March 2019, to 4.7 percent from the 4.4 percent seen earlier.

"If the current trend of increasing inflation and oil prices continues, we expect another 25 bps hike somewhere during this fiscal year," said Sudhakar Pattabiraman, head of research operations at research firm William O'Neil.

Wednesday's rate increase, the first since January 2014, was predicted by 46 percent of respondents in a Reuters poll this week.

All six members on the policy panel voted for a rate hike.

The reverse repo rate was increased by 25 basis points to 6.00 percent.

India's annual consumer inflation was 4.58 percent in April, the sixth straight month it topped the RBI's medium-term 4 percent target.

The Indian central bank becomes the latest in Asia to increase rates recently, to battle inflationary pressures or support the domestic currency.

In May, the Philippines and Indonesia lifted their benchmark rates for the first time since 2014. In March, China raised a key short-term rate following a Federal Reserve's rate hike.

India's rate increase comes one week before a Fed policy meeting that's widely expected to raise U.S. interest rates.