The Bank confirmed in the minutes that an "ongoing tightening of monetary policy" would be needed to rein in inflation over the "more conventional" two-year horizon, if the economy grows in line with its forecasts. The central bank had increased repo rate by 25 bps to 6.25 per cent in its last policy meet in June.
"The Monetary Policy Committee (MPC) chose to increase repo rate by 25 bps (for the second time in a row) to 6.50 per cent by 5-1 vote and kept the stance neutral". It projected inflation at 4.8 per cent in the second half of 2018-19.
Overall inflation rate rose from 4.5% to 4.6% between May and June, while retail inflation edged up to 5% - significantly higher than the bank's 4% target.
In the third bi-monthly monetary policy of the 2018-19, RBI Wednesday cited various concerns to inflation like volatile crude prices, uncertainty in the global financial market, hardening of input prices for corporates, uneven distribution of rainfall, fiscal slippages and rise in MSP of foodgrains.
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".
India Ratings and Research's principal economist, Sunil Kumar Sinha, said by keeping monetary policy stance neutral, the apex bank has kept the window open to move the policy rate in future in either direction subject to data. 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.
Central banks in many advanced economies have raised interest rates and moved to end stimulus programs as the global economy shakes off the lingering effects of the global financial crisis.
Standard Chartered Bank chief executive officer (India) Zarin Daruwala said, "The 25 basis points hike reaffirms RBI's commitment to bringing CPI inflation to 4 per cent on a durable basis". This, according to the RBI, could influence actual inflation outcomes in the months to come.
"We expect RBI's tenor to remain neutral to hawkish".
The Bank of England has raised the base rate to 0.75%, just the second time it has been hiked in a decade.
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...
"Its a slightly more hawkish rate hike than expected". Core inflation - which strips out volatile food, fuel and light prices - has been sticky at a four-year high of more than 6 per cent, indicating demand pressures in the economy.
"Subsiding consumer and business confidence, especially in forward looking gauges, together with the responses to the Ipsos Mori opinion poll, suggest strongly in our view that private sector economic agents are increasingly and demonstrably not behaving in this way", Wraith concluded.