India's central bank has hiked its key interest rate by 25 basis points in an attempt to bring down inflation, which had been hovering higher than the bank preferred it to in recent weeks.
According to reports on Tuesday, the Reserve Bank of India (RBI) in a statement said that the benchmark repo rate, at which it lends to commercial banks, would rise to 8.0 percent.
The move is expected to push up interest rates on loans for consumers and increase the cost of borrowings for corporates, reports said.
The RBI move reportedly ran counter to predictions by analysts that the repo rates would be kept on hold as the Wholesale Price Inflation index fell to 6.16 percent in December from a year earlier, down sharply from 7.52 percent in November 2013.
Giving reasons for the hike, RBI governor Raghuram Rajan said inflation continued to be under pressure due to rising cost in services, among other economic factors.
"It is critical to address these risks to the inflation outlook resolutely in order to stabilise and anchor inflation expectations, even while recognising the economy is weak and substantial fiscal tightening is likely in Q4 (January to March)," reports, quoting him, said.
Rajan’s move went contrary to the demands by the Indian market which had sought a rate cut to boost growth and attract fresh investments. Tuesday’s decision is expected to put pressure on the rupee which a day earlier sank to its lowest level in two months, reports said.
The RBI raised rates in both September and October in an attempt ward off rising inflation, but the federal bank then took markets by surprise by desisting from hiking rates in December despite the fact that inflation accelerated to a 14-month peak.