Be prepared for higher EMIs after twin RBI rate hikes

The Bank of England’s monetary policy committee appears almost certain to raise interest rates this week

The Bank of England’s monetary policy committee appears almost certain to raise interest rates this weekYUI MOK PA

The Reserve Bank of India (RBI) on Wednesday hiked repo rate by 25 basis points (bps) to 6.50 per cent.

The Reserve Bank of India (RBI) today hiked the repo rates, or interest rates at which the country's central bank lends money to banks.

Today's hike in interest rates will make loans more costlier in the coming days.

Retail inflation has been projected at 4.4 percent for Q2 of F1Y 19, excluding HRA impact, 4.7-4.8 percent in H2 in FY19 and 5 percent in Q1 of FY20 as the committee anticipates a hike in food prices due to the recent Minimum Support Price (MSP) hike.

With expectations of a rate hike nearly entirely priced into the market, investors are mostly focused on what message the Monetary Policy Committee sends on Thursday about its intentions for further increases in borrowing costs.

Ian Stewart, chief economist at Deloitte, said: "The Bank has so clearly telegraphed this rate rise that markets would have been shocked had rates been left on hold".

Policymakers at the Bank said that momentum in the economy had recovered after an initial dip in the first three months of the year, which was believed to be caused by...

The monetary policy committee "could afford to do a "wait and watch" at this juncture and consider more data points before a rate action", said Lakshmi Iyer, Kotak Mutual Fund's chief investment officer debt.

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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".

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. Markets are already expecting a rise, and from here on in, further hikes are going to be few and far between because United Kingdom economic growth is so fragile. Nearly all (96%) of new mortgage loans are offered on a fixed rate, usually for the first two or five years.

Banks tend to push through rate rises on mortgages immediately but are much slower to raise savings rates.

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.

The RBI, however, maintained its "neutral" stance on policy, as it has done over five previous bi-monthly policy reviews which allows it to move either way on rates.

Patel said that given such an external environment, the central bank has to run a tight ship on the risks it can control to maximise the chances of ensuring macro-economic stability and continuing with the growth profile of 7-7.5 per cent.

Carney said during a press conference that improving wage growth and a strong labor market led to the unanimous vote for a rate hike.

But BoE Governor Mark Carney says that, even if Britain's economy is growing only modestly, it risks overheating unless borrowing costs rise from their crisis-era emergency lows, something the central bank began in November with its first rate hike in more than 10 years.

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