India's central bank raises key lending rate to 6.5 percent

India's central bank raises key lending rate to 6.5 percent

India's central bank raises key lending rate to 6.5 percent

"It's very unlikely that the conditions over the next six to eight months will warrant another move in monetary policy", said Dean Turner, U.K. economist at UBS Wealth Management.

The Reserve Bank of India (RBI) on Wednesday made a decision to increase the policy repo rate by 25 basis points to 6.5%.

The RBI's Monetary Policy Committee (MPC) raised the repo rate by 25 basis points to 6.50 percent.

With five out of the six members voting for the increase, the Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel increased repo rate, at which it lends to other banks, to 6.5 per cent from 6.25 per cent now but kept its policy stance as "neutral". The projected inflation rate is above its targeted comfort level of 4 per cent. RBI expects the inflation rate to gradually go up to 5 per cent by the first half of 2019-20, which will be an election year.

The rate they decide sets a reference point for banks and building societies, so their decision affects millions of people across the UK.

Despite the rate hike, the RBI maintained a neutral stance, which will give the central bank flexibility to move either way, depending on the inflation trajectory.

The decision was predicted by most economists after Governor Mark Carney and other rate setters argued the economy had recovered from a sharp slowdown in the first quarter.

In its report, DBS said that considering the challenges facing the economy due to the weak rupee and the rising oil prices, the RBI would consider hiking interest rates right.

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Consequently, the rate hike affected in the third monetary policy review for 2018-19 is expected to dampen the industrial output scenario.

Similarly, the BoE's new inflation forecasts will be watched as a sign of whether it thinks investors are being too relaxed by betting on no follow-up rate hike until late 2019 and only one more nearly at the end of its three-year forecast period.

Mark Carney: "What banks pay (.) in terms of returns, partly depends on what it costs them to borrow in worldwide markets, and that had been very low at the time of the last rate increase".

Based on an overall assessment, it said, GDP growth projection for 2018-19 is retained, as in the June statement, at 7.4 per cent, ranging 7.5-7.6 per cent in first half and 7.3-7.4 per cent in second half, with risks evenly balanced.

"This base rate rise carries much expectation, with savers hoping it will boost returns".

Killol Pandya, Head, Fixed Income, Essel Mutual Fund, said, while market is discounting a rate hike, he believes it is a touch-and-go matter with nearly even probability of rate action. It held rates steady on Wednesday, but current plans involve at least two more hikes this year.

"May would be my guess for the next hike", said Kallum Pickering, a United Kingdom economist at Berenberg.

But Mr Carney said growth had since "rebounded", and the Bank raised its United Kingdom economic outlook in 2019 from 1.7 to 1.8 per cent growth in GDP.

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