RBI policy move: Banks expected to raise term deposit rates gradually

Possible Currency War A Risk To India's Growth RBI Governor

RBI policy move: Banks expected to raise term deposit rates gradually

The Reserve Bank of India today hiked its repo rate by 25 basis points, for the second consecutive time.

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

Given the increase in crude prices and higher inflation expectations, Valecha sees one or two more rate hikes by the RBI this year. 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.

The first hike in the current cycle of rising interest rate trajectory was in June when the repo rate was increased from 6 per cent to 6.25 per cent.

In a statement after today's meeting, the RBI's monetary policy committee said that the repo rate had been hiked with the objective of achieving a medium-term target for consumer price index inflation of 4 per cent, while supporting growth. Nearly all (96%) of new mortgage loans are offered on a fixed rate, usually for the first two or five years.

Here's Brooks one last time: "Earlier this year the BOE Governor Mark Carney said that the Bank would give its view on the latest equilibrium, or neutral, interest rate for the United Kingdom economy".

The Bank of England raised its benchmark rate to 0.75% from 0.5% despite worries over the strength of the United Kingdom economy and uncertainty over Brexit.

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The central bank said that if the economy grows as expected, "an ongoing tightening of monetary policy over the forecast period would be appropriate" but Carney repeated its phrase that rate hikes will be limited and gradual.

"Scotland's growth over the last three years has lagged behind the United Kingdom, so whilst the Bank may judge that the United Kingdom economy is in sufficiently robust health to cope with a rate hike, a rate rise in Scotland may be more of a challenge".

The retail inflation, which is factored in by the MPC, spiked to a five-month high of 5% in June on costlier fuel. In a rising rate scenario, it makes vast sense for customers repaying loans to make periodic principal pre-payments. The U.K. expansion is expected to be just 1.4 per cent this year, though it'll average about 1.75 per cent a year through 2020, slightly above the 1.5 per cent long-term potential.

In its quarterly inflation report, the Bank kept its forecast for growth this year unchanged at 1.4%, but increased the outlook for 2019 to 1.8% from the 1.7% previously predicted.

Rates have gone up from 0.5% to 0.75% with the changes likely to affect millions of savers and borrowers. However, it's ultimately up to the banks about how much their want to increase this. This is especially helpful while you're in the first half of your loan tenure.

V S Parthasarathy, chief financial officer, Mahindra Group: The rate hike should help temper inflation and hopefully provide a support to the Rupee.

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

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