The Reserve Bank of India Wednesday chose to hike interest rate for the second time by 25 basis points (0.25 percent), taking the interest rate now to a two year high.
The central bank, in its third bi-monthly policy of the current financial year, raised the benchmark repo, or the short-term rate at which it lends to other banks, by 25 basis points to 6.5 per cent.
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.
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".
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.
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.
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"Since the RBI is committed to bringing down inflation, they don't have a choice but to raise rates", said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings.
This the 1st time since October 2013 that repo rate has been hiked at 2 consecutive RBI policy meetings.
The Bank's monetary policy committee is widely expected to increase the cost of borrowing from 0.5% to 0.75% on Thursday.
Millions of borrowers on variable rate mortgages will be affected by the decision, with a quarter-point rise adding around £16 a month or £192 a year to the average mortgage.
The MPC said momentum in domestic economic activity continued to be sustained and the output gap had virtually closed.
Following the rate hike, the BSE index Sensex slipped from record high to ends 84.96 points lower at 37,521.62.
Second straight hike by the RBI, after the first one in June.
"The banks have already started raising rates. And we took two steps - once in June and once in August - to maximise our chances that we don't drift away from four per cent and in fact move towards four per cent on a more durable basis", said RBI governor Urjit Patel.
The Bank of England is set to hike interest rates for just the second time since the financial crisis. The rise in the minimum support price of foodgrains will also play its part in keeping the inflationary trend on the higher side.