Will the ongoing rate hike cycle be a shallow one?

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The one reason that may have prompted the RBI to hike interest rates is the core inflation, which has been on a upsurge.

"Why rock the boat just as we approach the business end of Brexit, all the more so given that inflation is not significantly above target?"

The financial markets have taken this on board and are forecasting one, and perhaps two, rises of 0.25% before 2020.

Reserve Bank of India hiked repo rate by 25 basis points. "The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis", it said.

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We think this decision will score well with domestic investors as well as reemphasise the inflation fighting credentials of the central bank in the eyes of the global community.

RBI Governor Urjit Patel at the third bi-monthly monetary policy press conference. "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".

In terms of inflation, RBI said, it is projected at 4.6 per cent in second quarter, and 4.8 per cent in the second half of 2018-19.

"Global rates are hardening, especially in the United States", he added. "Given this, we have to ensure that we run a tight ship on the risks that we control to maximize the chances of ensuring macro-economic stability and continuing with the growth profile of 7-7.5 percent".

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On the growth outlook, the MPC said the progress of the monsoon so far and a sharper than the usual increase in MSPs of kharif crops is expected to boost rural demand by raising farmers' income.

In June, the repo rate or the benchmark lending rate was raised for the first time in over four years, by 25 basis points to 6.25 percent. The commercial banks borrow funds only if they witness a shortfall in their funds. Five of the six members on the rate panel voted in favour of a rate increase.

However, the monetary policy committee maintained its stance at neutral.

The central bank has pegged the retail inflation at 4.8 per cent for the second half of the ongoing fiscal anticipating increase in food prices due to hike in minimum support price (MSP).

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Meanwhile, the Sensex fell almost 120 points to 37,440 after RBI policy decision but recovered later to trade around 50 points lower at 37,556 level.

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