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

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

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

The Reserve Bank of India (RBI) hiked the repo rate (at which it lends to banks) by 0.25 per cent to 6.5 per cent and the reverse repo rate (at which it borrows from banks) to 6.25 per cent.

The rate action was in line with a Reuters poll last week, which showed 37 of 63 economists expecting a rate increase.

The Bank's last move to raise rates in November from 0.25% to 0.5% was the first such move for more than 10 years, but merely reversed the cut made in the aftermath of the Brexit vote.

Mortgage lender Housing Development Finance Corporation (HDFC), meanwhile, hiked home loan rates by 20 basis points. Markets are already expecting a rise, and from here on in, further hikes are going to be few and far between because United Kingdom economic growth is so fragile.

Those on fixed-rate deals will feel no immediate impact from a rate rise.

Tej Parikh, senior economist at the Institute of Directors, said:"The Bank has jumped the gun with the today's rate hike". If rates do go up to 0.75% that will be highest since early 2009.

The rate hike, described as the first "real" interest rate rise since the financial crisis, will be seen by many as an attempt by Governor Mark Carney to build ammunition to tackle a potential economic downturn following Brexit.

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In comments that will anger Brexiteers, the Bank of England Governor said Britain "accidentally" leaving the European Union without a deal and no transition in March 2019 would be "highly undesirable" for the economy.

"Weather effects - both the snow-related disruption in February and March and the unseasonably warm weather and long sunshine hours in May and June - seemed to have accounted for around half of the second quarter rise", it added.

But sterling fell against the dollar and the euro and British government bond prices rose after BoE Governor Mark Carney stressed the gradual path for rate hikes ahead.

The RBI monetary policy committee (MPC) meeting was held for three days and concluded on Wednesday with the announcement of this policy decision among others.

If you have a variable-rate mortgage on a property, your monthly payments are expected to increase. While raising the key policy rates, the RBI, however, has maintained the neutral policy stance. "Steel consumption also accelerated in May", the central bank said in a media release. The RBI aims to keep consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth. "We're having conversations and we expect those to be addressed". The RBI has forecasted a mildly rising inflation trajectory - 4.8% in H2FY18 and 5% in Q1FY20.

Smith goes on to say the BoE may be looking to raise rates faster and further than markets now give it credit for, given its latest forecasts for inflation and economic growth, but that Brexit may prevent it from doing this.

The average standard variable rate mortgage is 4.72%.

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