The central bank had increased repo rate by 25 bps to 6.25 per cent in its last policy meet in June.
The monetary policy committee (MPC) kept its stance neutral, aiming to contain inflation at 4% within a 2% band, thus making future rate hikes possible.
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.
Rana Kapoor, MD & CEO, Yes Bank: The RBI rate hike is a rational response to the recent acceleration in inflation momentum.
“While an interest rate rise is positive news for people living on their savings income, or holding pensions and investments, it may prove to be the tipping point for those in financial difficulty or struggling with debt”, said Richard Haymes, head of financial difficulties at credit data firm TDX Group.
The Bank confirmed in the minutes that an “ongoing tightening of monetary policy” would be needed to rein in inflation over the “more conventional” two-year horizon, if the economy grows in line with its forecasts.
Five of the six members on the panel voted for a rate increase in the latest policy review.
RBI governor in the post-policy conference pointed out that crude oil prices continue to be volatile and vulnerable to both upside and downside risk. Along with the decision on repo rate, the RBI also takes the decision on reverse repo rate, inflation, and GDP outlook.
However, it’s ultimately up to the banks about how much their want to increase this.
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.
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. This affects 3.5 million households in the United Kingdom who are on a standard variable or tracker rate mortgage, meaning someone paying a £200,000 mortgage will pay around £300 extra a year – that’s £25 more a month.
The RBI’s policy statement also mentioned that minimum support price (MSP) hike as the primary factor stoking inflation this year. He added that this would now obviate the chances of another hike in October.
“Scotland’s growth over the last three years has lagged behind the United Kingdom, so whilst the Bank may judge that the United Kingdom economy is in sufficiently robust health to cope with a rate hike, a rate rise in Scotland may be more of a challenge”.
Most economists believe a rate rise this month would be the only one in 2018, with the next one not due until at least February 2019.
The report showed its predictions are based on financial market expectations for rates to rise to 1.1% by mid-2021, which would suggest two more quarter-point rises, with the next not until next May.