India central bank doubles down on inflation fight

India central bank doubles down on inflation fight

RBI Governor Urjit Patel at the third bi-monthly monetary policy press conference.

The Reserve Bank of India raised the rate at which it lends to banks from 6.25% to 6.5% on Wednesday, after hiking it for the first time in four years in June.

Ironically, though the RBI has behaved on expected lines, it has increased interest rates twice while maintaining its "neutral" stance.

Though the prices remained below its estimated trajectory, the RBI has forecast retail inflation at 4.6 per cent in the second quarter of the fiscal, 4.8 per cent in the second half of the fiscal and five per cent for the first quarter of 2019-20.

Adjusted for the BoE's inflation target, this would imply Bank Rate of 2-3 percent to keep growth and inflation rates stable when the economy is running at full capacity.

Second straight hike by the RBI, after the first one in June.

A survey published by the British Chambers of Commerce on Thursday showed half of British firms planned to increase pay by more than 2 percent over the next year, echoing other signs of a slow improvement in pay growth.

It will come as a blow to millions of mortgage borrowers on variable rate deals, with a quarter point rise adding around £16 a month and £190 a year to the average mortgage. 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.

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James Smith, an economist at ING, said: "Despite the Bank's optimistic outlook, we think policymakers will find it tricky to hike rates again before Brexit".

Rana Kapoor, MD & CEO, Yes Bank: The RBI rate hike is a rational response to the recent acceleration in inflation momentum. 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.

Various indicators suggest India's economic activity continues to be robust, says RBI in its monetary policy statement. Five out of six committee members had voted for an increase in rate.

It also fleshed out its thinking on how far it is likely to go with its planned rate hikes by publishing a new long-term forecast for what it called Britain's trend real interest rate, or "R*", of zero to 1 percent, more than 2 percentage points below its pre-financial crisis level.

Yes Bank's managing director and chief executive officer, Rana Kapoor, said, "With peak of CPI inflation now behind us, and monetary transmission playing out gradually hereon, I expect a pause in the remainder of FY19".

Sterling, trading at $1.3081 before the rate rise was announced, rose to $1.3129, down 0.1 percent on the day against a broadly stronger dollar. For the April to June quarter, the rates remained unchanged.

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