India’s central bank raises interest rate to fight inflation

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On inflation RBI's assessment is nearly unchanged or slightly better.

As per the RBI, the growth would be in the range of 7.5-7.6 per cent in first half of the fiscal and 7.3-7.4 per cent in October-March 2018-19 period "with risks evenly balanced".

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

Meanwhile, reverse repo, the rate at which the central bank borrows money from commercial banks within the country, was adjusted to 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.

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.

The MPC noted that retail inflation, measured by the year-on-year change in the CPI, rose from 4.9 per cent in May to five per cent in June, driven by an uptick in fuel inflation.

In the third bi-monthly monetary policy statement for 2018-19, RBI said various indicators suggest that economic activity has continued to be strong. India's financial year runs from April to March.

The meeting of Reserve Bank of India's monetary policy committee is going to e held on Monday. This is because the prices of bonds fall, and bring down the NAV of bond funds. But the rate hike will increase returns on some investments. This means marginally higher interest earnings for customers opening fixed deposits with banks.

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"The Committee judges that an increase in Bank Rate of 0.25 percentage points is warranted at this meeting".

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".

"There might not be much urgency in delivering back-to-back rate hikes when the policy stance is still neutral".

Barua, however, said if there is an escalation in trade war risks and a resultant global output compression, then the RBI could be prompted to stay on a prolonged pause.

MSP Impact: Government had recently increased the price at which it will purchase crop from farmers, which many had said will have a severe impact on the economy. "On the other hand, the announcements of additional open market operations by the RBI could help cap the G-sec yields". This will affect EMIs of housing and automobile loans for consumers.

The Bank is also expected to reveal its estimate for the long-term neutral level for interest rates, a signal of how high borrowing costs could eventually go.

Adhil Shetty, CEO, BankBazaar.com: "In June, several leading banks including SBI had increased their MCLR".

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. "Pre-payments made in the first half have enormous impact in reducing your long-term interest outgo and thus ensuring savings".

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