India bank raises interest rates to curb inflation

Sameer Hashmi: "[Mr Rajan] got a rock-star-welcome, but everyone is so shocked and surprised they don't know what to call him!"

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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.

Analysis

Raguram Rajan, on his first day in office, had said that some of the actions he would take would not be popular and that he was not here to win votes or Facebook likes.

He has proved that in his debut monetary policy review.

The review sends out two clear messages - one, his immediate priority is to deal with rising prices; and two, he won't give in to pressure from the government and industry to cut rates even if that means slower economic growth in the short term.

In less than 20 days since taking charge, Mr Rajan has taken some unconventional steps to address the economic problems.

Investors and financial markets may now have to gear up for more surprises that he may pull out in future.

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.

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