In its statement on Thursday, the central bank said it saw "tentative signs that actual and prospective protectionist policies were starting to have an adverse impact" on global trade.
Mumbai: Home, auto and personal loans are set to get costlier as the Reserve Bank of India on Wednesday raised the repo rate, the rate at which it provides funds to banks, by 25 basis points, citing runaway inflation.
With five out of the six members voting for the increase, the Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel increased repo rate, at which it lends to other banks, to 6.5 per cent from 6.25 per cent now but kept its policy stance as "neutral".
As per the RBI, the growth would be in the range of 7.5-7.6 per cent in first half of the fiscal and 7.3-7.4 per cent in October-March 2018-19 period "with risks evenly balanced". The Bank has been signalling for some time that rates will need to rise to cool inflation, which surged after the Brexit vote sent the pound plunging and still remains above target, at 2.4%. In June, RBI had projected consumer inflation at 4.8-4.9 per cent in the first half and 4.7 per cent in the second half of 2018-19.
"The main argument for raising rates now is that it gives the Bank more room for manoeuvre when the next downturn hits". "Today's "decision of the MPC is consistent with the neutral stance of monetary policy", given the upside pressure that inflation continues to exhibit".
Shah hoped the interest rate regime would stabilise following this increase. Sixty percent of the economists polled believed that there may be a 25 basis points (bps) rate hike, while the remaining expected a status quo.
The currency and inflation woes come against the backdrop of an economy that's growing faster than any other major nation, strengthening Prime Minister Narendra Modi's position as he prepares for elections next year.
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Edelweiss Securities said in its research report that they do not think the RBI will make any changes in interest rates this time.
Possibly but the tone from the Bank of England governor suggests the next rate rise might not be until 2019 at the earliest.
According to Patel, rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity.
But the MPC said that the recent data which showed a dip in output in the first quarter was temporary, as momentum recovered in the second quarter.
"The reverse repo rate was accordingly adjusted 25bps higher to 6.25%". That pushes up the price of imported goods, fueling inflation.
But some economists have questioned whether the BoE was wise to raise rates with uncertainty surrounding the economy.
But Mr Carney said growth had since "rebounded", and the Bank raised its United Kingdom economic outlook in 2019 from 1.7 to 1.8 per cent growth in GDP.