The move came as no surprise as the markets were pricing in a 91% chance of a rate hike, but it does come in the face of weak and fragile United Kingdom economic growth figures.
Second straight hike by the RBI, after the first one in June. The RBI chose not to tinker with the CRR or with the SLR, which are now steady at 4 per cent and at 19.5 per cent respectively.
Impact on Bank Fixed Deposits With an increase in policy rates, bank deposit rates are expected to rise as well.
It saw geopolitical tensions and elevated oil prices to be sources of risk to global growth.
"For me the pound is moving lower as Carney is showing some sympathy towards a possible hard Brexit, they are preparing for it, as we know". Naresh Takkar, MD & Group CEO, ICRA Ltd, said, "Looking ahead, we expect the 10-year G-sec yield to trade in a range of 7.65-8.0 percent in the remainder of this quarter". The rupee is down almost 7 per cent against the dollar this year to be the worst performer in Asia.
Various indicators suggest India's economic activity continues to be robust, says RBI in its monetary policy statement. "The effect of hike in MSP will play out gradually over a period of time". The Central Government has chose to fix the MSPs of at least 150 per cent of the cost of production for all kharif crops for the sowing season of 2018-19.
In a public lecture in March, RBI governor had emphasised on the need for banking regulatory powers that are neutral to bank ownership, to provide a level playing field between public sector and private sector banks.
Samuel Tombs, at Pantheon Macroeconomics, added that while Brexit is likely to delay another imminent rise, "we expect the economy to regain some momentum next year following a soft Brexit outcome, enabling the MPC to raise Bank rate twice in both 2019 and 2020".
"Even as inflation projections for Q2 have been revised marginally downwards vis-a-vis the June statement, projections for Q3 onwards remain broadly unchanged, RBI said".More news: Congo confirms 4 Ebola cases week after outbreak ends
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Simultaneously, it raised average inflation projection for 2018 second half from 4.7% in June to 4.8%.
Following the rate hike, the BSE index Sensex slipped from record high to ends 84.96 points lower at 37,521.62.
LONDON-The Bank of England raised its benchmark interest rate for only the second time in a decade, as worries over inflation trumped concerns about Brexit and a brewing global trade war.
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.
The National Institute of Economic and Social Research (Niesr) warned on Wednesday that the Bank should raise interest rates on Thursday, but "stand ready" to reverse the hike if circumstances change.
"The Committee judges that an increase in Bank Rate of 0.25 percentage points is warranted at this meeting".
The one reason that may have prompted the RBI to hike interest rates is the core inflation, which has been on a upsurge.
Given that a rate hike is nearly a foregone conclusion, other parts of the MPC's decisions, and the minutes of the meeting are likely to provide more intrigue.