RBI increases repo rate by 25 bps to 6.50%, reverse repo unchanged

RBI raises key policy rate by 25 bps to 6.50%, holds stance at neutral

A rise in these interest rates, generally pushes banks to hike their loans and deposit rates, though not always as cost of borrowing from the RBI increases. The following hike in the repo rate at two consecutive policy meetings by the central bank comes after the hikes it had made in October 2013.

Dheeraj Singh, Head of Investments & Fund Manager - Fixed Income, Taurus Mutual Fund: "The decision to hike rates has, quite clearly, been driven by the persistent increase in headline and core inflation that we have witnessed in the last couple of months".

Mark Carney, Governor of the Bank of England, said rates would need to rise further to bring inflation back to the 2% target over the next few years, but stressed hikes would be "limited" and "gradual". With regard to inflation, RBI said, it is projected at 4.6 per cent in second quarter, and 4.8 per cent in the second half of 2018-19. The RBI aims to keep consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth. India's financial year runs from April to March.

"Guidance and communication from the MPC over recent months, and in particular the lack of any attempt to rein in the ever higher market-implied probability of a 25bp hike, suggests a majority of members are set to vote for a hike on Thursday", he said.

The 10 year-GSec yields have declined from 7.92 percent to 7.78 percent during June 6- July 27.

"The Monetary Policy Committee continues to recognize that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of European Union withdrawal", it added.

The central bank said inflation in two years' time was likely to be 2.09 percent, above the BoE's 2 percent target.

Jon Osterl, UK CEO at finder.com: "It's particularly good news for savers, who have suffered ultra-low interest rates for the past decade".

The governor said trade skirmishes have "evolved into tariff wars and now we're possibly at the beginning of currency wars".

Higher rates make loans slightly more expensive, weighing on some mortgage holders and businesses looking for credit to invest.

The RBI's policy statement also mentioned that minimum support price (MSP) hike as the primary factor stoking inflation this year. Accordingly, the Marginal Standing Facility rate and the Bank Rate too stand adjusted at 6.75 per cent.

He said: "Rates can be expected to rise gradually". Markets are pricing a more than 90% chance of a hike, according to the latest data.

The move came as no surprise as the markets were pricing in a 91% chance of a rate hike, but it does come in the face of weak and fragile United Kingdom economic growth figures.

When policymakers raised interest rates last November, it predicted that savers would reap the benefits of a rate rise more quickly than borrowers would feel the pinch.

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