With five of its members voting for the increase, the 6-member 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 but kept its policy stance as "neutral".
Thirty-seven of 63 economists in a Reuters poll last week said the RBI will raise rates n Wednesday, while 22 said the next hike would come later this year, or early in 2019.
Meanwhile, reverse repo, the rate at which the central bank borrows money from commercial banks within the country, was adjusted to 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.
The interest rate rise will increase the cost of around 3.7 million residential mortgages that have variable or tracker rates.
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".
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The Bank of England has raised interest rates to 0.75% today, the first time it's been above 0.5% since the financial crisis a decade ago.
Hinting at sticking to the deficit targets, Patel said, "We do have things that are in our favour, which you're aware of, and if we continue along that path, we ensure that we don't add to the global risk profile that would adversely affect us".
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". GDP growth for the first quarter of 2019-20 is projected at 7.5 per cent, it further said.
The monetary policy committee "could afford to do a "wait and watch" at this juncture and consider more data points before a rate action", said Lakshmi Iyer, Kotak Mutual Fund's chief investment officer debt. However it chose to pre-empt inflation by hiking the rates by another 25 basis points ahead of the inflation risks actually manifesting itself.
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But Mr Carney and the MPC have been careful to stress repeatedly that any rises will be "gradual" and "limited" and not see rates increase to the high levels seen in the past.
The financial markets have taken this on board and are forecasting one, and perhaps two, rises of 0.25% before 2020. While raising the key policy rates, the RBI, however, has maintained the neutral policy stance.
However, after the last rate rise in November, half of savings accounts did not move at all.
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.
"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.
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