RBI increases repo rate by 25 bps to 6.5% in August policy

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

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

Driving these decisions are signs that inflationary pressures that have mostly lain dormant for years are strengthening as the global economy enjoys a robust, if uneven spell of growth, led by a booming U.S. Figures released Thursday by the Organization for Economic Cooperation and Development showed global inflation hit a four-year high in June. The Czech central bank raised interest rates on Thursday for the fifth time in a year.

The statement noted that "fuel and light group" inflation rose sharply in the period since the previous policy review, pulled up by liquefied petroleum gas (LPG) and kerosene prices.

"Make sure you keep an eye on which banks are offering the best interest rates as not all of their products will increase by the BoE's 25 basic points".

The reverse repo rate or the rate at which RBI borrows from commercial banks stands adjusted to 6.25 per cent.

The RBI policy retained the GDP growth projection for 2018-19, as in the June statement, at 7.4 per cent, ranging between 7.5-7.6 per cent in the first half of the fiscal and 7.3-7.4 per cent in the second half of the fiscal.

RBI has projected inflation at 4.6 per cent in Q2, 4.8 per cent in H2 of 2018-19 and 5.0 per cent in Q1 2019-20.

The financial markets have taken this on board and are forecasting one, and perhaps two, rises of 0.25% before 2020.

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The overall banking system liquidity continues to be pressured, with liquidity deficit witnessing a sustained increase in the last three weeks.

But BoE Governor Mark Carney says that, even if Britain's economy is growing only modestly, it risks overheating unless borrowing costs rise from their crisis-era emergency lows, something the central bank began in November with its first rate hike in more than 10 years. "Short-term debt funds are expected to deliver lower volatility and low risk in this scenario".

Banks tend to push through rate rises on mortgages immediately but are much slower to raise savings rates. This means marginally higher interest earnings for customers opening fixed deposits with banks. Experts believe that the central bank can increase interest rates. "The trade skirmishes evolved into tariff wars and now we are possibly at the beginning of currency wars", said Patel in his post-policy interaction on Wednesday. "On the other hand, the announcements of additional open market operations by the RBI could help cap the G-sec yields".

"Pay rises are only just managing to outpace inflation, so this increase is likely to do little to encourage consumer confidence among the millions of Britons with variable rate mortgages". However it chose to pre-empt inflation by hiking the rates by another 25 basis points ahead of the inflation risks actually manifesting itself.

"Several high-frequency indicators of services activity increased at a faster pace in May-June".

Possibly but the tone from the Bank of England governor suggests the next rate rise might not be until 2019 at the earliest.

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