India’s new central bank governor has raised key interest rates by a quarter of a percentage point in an attempt to reduce inflation.
The repo rate – the rate at which the central bank lends to commercial banks – was raised from 7.25% to 7.50%.
The cash reserve ratio – the percentage of banks’ deposits they must keep in cash – has been kept unchanged.
Earlier this week, the rate of inflation hit an annual rate of 6.1%, which was a six-month high.
“Bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately,” Reserve Bank of India (RBI) president Raghuram Rajan said.
Mr Rajan, who took over as the head of the central bank earlier this month, was widely expected by economists to keep rates unchanged despite the rate of inflation.
“Hiking the repo rate was unexpected. The governor is clearly worried about inflation. He is saying the improved international conditions will take care of the current account deficit funding and his focus will shift to fiscal deficit and inflation, which were taking a backseat,” said Anjali Verma, chief economist at PhillipCapital.
India’s main share index fell sharply after the announcement to trade 2.6% lower, while the rupee extended earlier losses to trade at 62.32 against the dollar.
India’s economy has been hurt by a range of factors in recent months.
Its growth rate has been hit by a slowdown in key sectors such as mining and manufacturing.
At the same time, foreign investors have pulled out money from the country because of the government’s failure to enact key reforms, as well as improving economic conditions in the US.