Economy

RBI increases repo rate by 25 bps to 6.50%

RBI increases repo rate by 25 bps to 6.50%

Inflation has remained above target for 17 consecutive months, with the Bank today upgrading its predictions on consumer price index (CPI) inflation.

The meeting was the last for Ian McCafferty, the former chief economist at the Confederation of British Industry who has called for interest rates to rise for the longest of any of the current MPC members.

The six-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel kept its stance at neutral as it sought to contain inflation while not choking growth.

Still, a sizable numbers of analysts and market participants believe the RBI could hold off and not hike interest rates, noting that the recovery is nascent and bank credit to corporates is not yet free flowing.

"Uncertainty around domestic inflation needs to be carefully monitored in the coming months", the central bank said while increasing its inflation projection.

"The main reason for changing the policy rate is to ensure that, on a durable basis, we come to and maintain the 4 per cent (inflation) target. It's not just core inflation but many other components as well", said the RBI.

Indonesia's central bank has been the most aggressive in Asia this year, hiking its benchmark rate 100 basis points between mid-May and the end of June.

The reaction in financial markets was muted.

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This is the first time since October 2013, where RBI has gone for a back-to-back rate hike.

On the growth outlook, the MPC said the progress of the monsoon so far and a sharper than the usual increase in MSPs of kharif crops is expected to boost rural demand by raising farmers' income.

Earlier, Investec economist George Brown said he is "fairly confident" the Bank will move to raise rates and is pencilling in an 8-1 vote in favour.

The Bank of England has raised interest rates above 0.5 per cent for the first time in almost a decade in a decision that will affect millions of savers, mortgage holders and borrowers across the UK.

The rate at which the RBI borrows money from commercial banks stands adjusted to 6.25%.

The central bank has pegged the retail inflation at 4.8 per cent for the second half of the ongoing fiscal anticipating increase in food prices due to hike in minimum support price (MSP).

Since RBI can not ignore threats from trade tensions between the USA and China and volatile financial markets, it has maintained the neutral policy stance.