RBI in a tight spot, is expected to raise rates again

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Despite the rate hike, the RBI maintained a neutral stance, which will give the central bank flexibility to move either way, depending on the inflation trajectory.

Meanwhile, reverse repo, the rate at which the central bank borrows money from commercial banks within the country, was adjusted to 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.

One basis point is a hundredth of a percentage point. The central bank had increased repo rate by 25 bps to 6.25 per cent in its last policy meet in June. It is the first time since October 2013 that the rate has been increased at consecutive policy meetings. All kinds of loans whether it is personal, auto or mortgage will be impacted by this hike. It may be noted that many banks including State Bank of India have selectively increased their interest rate on fixed deposits, which is likely to increase their lending rates.

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Two reasons were stated by economists for the RBI to increase the rates - one, core inflation, which is the non-food, non-oil inflation, quickened to 6.4 percent in June and the second, is the government decision on increasing the minimum support price (MSP) for kharif crops to support farmers.

Five members of MPC - Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral V Acharya and Urjit R Patel voted in favour of the decision while Ravindra H Dholakia voted against the decision.

The repo rate is basically the rate at which the RBI lends short-term money to all the banks.

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The RBI has projected the inflation at 4.6 per cent in Q2, 4.8% in H2 of 2018-19 and 5.0% in Q1 of 2019-20 "with risks evenly balanced".

Replying to a question about whether borrowing is cheaper in the UAE or in India for NRIs, Valecha said: "It is cheaper to get a loan in UAE than in India as of this hike, although the US Federal Reserve is supposed to hike rates much more aggressively than the RBI".

India's annual consumer inflation hit 5 per cent in June, the eighth straight month it topped the RBI's medium-term 4 per cent target.

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