Loans to get costlier as RBI hikes repo rate again

RBI snip 2

The central bank had increased repo rate by 25 bps to 6.25 per cent in its last policy meet in June.

The reverse repo rate, at which it borrows from banks, was also raised by similar proportion to 6.25 per cent.

"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.

RBI also raised the inflation projection to 4.6 per cent in second quarter of fiscal 2019, 4.8 per cent in second half of 2018-19 and 5 per cent in first quarter of 2019-20.

Rating agency Crisil believes the RBI will be on hold hereon unless higher-than-anticipated upside risks to inflation from crude oil, stronger demand conditions and food prices materialise.

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

The main considerations underlying the decision are set out in the statement below.

The MPC said momentum in domestic economic activity continued to be sustained and the output gap had virtually closed.

While the RBI on Wednesday marginally trimmed its inflation projections for the current quarter, the central bank said its inflation projections beyond that remain "broadly unchanged". Economists say that more rate hike could be on the cards this year.

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The bank's decision to raise rates comes as global central banks, such as the US Federal Reserve, the Bank of England and the Indonesian central bank also adopt a tightening path.

Possibly but the tone from the Bank of England governor suggests the next rate rise might not be until 2019 at the earliest.

The increase is the second time the BoE has increased rates since cutting to 0.5% in March 2009 when the United Kingdom was mired in recession.

RBI had increased the benchmark short term lending rate (repo rate) by 0.25% to 6.25% in its last policy review in June on inflationary concerns.

He said: "Someone on the average 4.75% standard variable rate borrowing £150,000 over 25 years would save over £6,000 over two years (before fees) by switching to the best two year fix". "While a quarter-point rise may have a limited long-term financial impact on most businesses, it risks undermining confidence at a time of significant political and economic uncertainty".

Bank of England governor Mark Carney has recently begun to speak more positively about the United Kingdom economy again, which led to the 0.25% hike to 0.75% today.

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 projected inflation rate is above its targeted comfort level of four per cent.

John Macintosh, head of tax in for Deloitte in scotland, said: "Sub-trend growth and a cloudy outlook hardly make a compelling case for a higher United Kingdom rates".

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