New Reserve Bank of India Governor Raghuram Rajan hiked the key interest rate yesterday for the second straight month, disregarding calls for lower borrowing costs as he remains focused on battling high inflation.
After its monetary policy meeting in the financial capital, Mumbai, the central bank said the benchmark repo rate at which it lends to commercial banks would be hiked by 25 basis points to 7.75 percent.
“The policy stance and measures ... are intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth,” Rajan said in a statement.
Most economists had predicted the hike by Rajan since wholesale inflation has been above the bank’s comfort zone of 5 percent for four successive months. India’s annual inflation jumped to a seven-month high of 6.46 percent last month, led by surging food and fuel prices.
The bank yesterday kept the cash reserve ratio — the percentage of deposits banks must keep with the central bank — unchanged at 4 percent.
However, Rajan did relax some liquidity tightening measures introduced by the central bank in July to help stem the rupee’s freefall.
The marginal standing facility — to lend to commercial banks when there is a shortage of funds in the market — was cut by 25 basis points to 8.75 percent.
Despite improvements in investor sentiment and a strengthening of the rupee since Rajan took charge, the central bank warned on Monday night that anchoring inflation expectations would be key to monetary policy.
“It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth,” Rajan said in yesterday’s announcement.
“The Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics,” he added.