RBI ups rates; loans to become costlier

Daniel Fowler
August 5, 2018

The Reserve Bank of India (RBI) in its third bi-monthly monetary policy statement for 2018-19 chose to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.5 per cent.

Thirty-seven of 63 economists in a Reuters poll last week said the RBI will raise rates n Wednesday, while 22 said the next hike would come later this year, or early in 2019.

The Monetary Policy Committee of the Reserve Bank of India on Wednesday made a decision to increase the repo rate by 25 basis points to 6.5 per cent, as it remained concerned about rising inflation.

Overall inflation rate rose from 4.5% to 4.6% between May and June, while retail inflation edged up to 5% - significantly higher than the bank's 4% target. Highlighting the inflation, the MPC projected 4.6 per cent in Q2FY19, 4.8 per cent in H2 of FY19 and 5 per cent in Q1FY20.

She said: "The Bank of England must tread carefully when it comes to further changes in interest rates".

RBI's monetary policy committee (MPC), headed by governor Urjit Patel, maintained a neutral stance towards the monetary policy.

Central banks in many advanced economies have raised interest rates and moved to end stimulus programs as the global economy shakes off the lingering effects of the global financial crisis.

The central bank said that if the economy grows as expected, "an ongoing tightening of monetary policy over the forecast period would be appropriate" but Carney repeated its phrase that rate hikes will be limited and gradual.

Bank of England
Jim Edwards The outside of the Bank of England

BoE Governor Mark Carney has said all bets on future BoE rate hikes would be off if there is a no-deal Brexit. Impact on Small Savings Scheme With two consecutive hikes in the repo rate, taking it to 6.50 percent, there is now a heavy expectation of an increase in small savings returns.

He said: "Rates can be expected to rise gradually".

Carney, who had argued that a slump in growth in the first quarter would prove temporary, said it would be wrong to be put too much emphasis on unknowns.

Economists have challenged the need for a rate hike now, given the Brexit risks and the potential for an escalating tariff conflict between Washington and Beijing to hit the global economy.

"The MPC continues to recognise 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 said. In its inflation report, the Bank published what it thinks is the natural interest rate for the United Kingdom economy. Higher government prices for some food crops also poses upside risk to inflation.

"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.

Naveen Kukreja, CEO and Co-founder, Paisabazaar.com: "Home loans will become costlier for fresh borrowers as and when the banks raise their respective MCLRs".

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