The Reserve Bank of India (RBI) in its policy review unexpectedly raised its policy interest rate on Tuesday by 25 basis points but said that if consumer price inflation eases as projected it does not foresee further near-term tightening - Governor Raghuram Rajan leaves cash reserve ratio (CRR) unchanged at 4 pct (read highlights below).
Having raised repo rate, RBI Governor Raghuram Rajan said slowdown in economy getting 'increasingly worrisome'.
The RBI policy review decision was driven by an expectation that consumer price index (CPI) inflation will remain high, an indication that Raghuram Rajan is looking to adopt a recent proposal to base its policy rate decisions on a CPI target.
The RBI raised its policy repo rate by 25 basis points to 8.00 percent.
Most economists in a poll conducted last week had expected no change in rates. However, expectations for a rate hike had increased after a central bank panel proposed to make CPI the main inflation benchmark.
Indian bonds, stocks and the rupee fell after the rate hike but soon recovered most losses on the back of the dovish statement. The benchmark 10-year bond yield which rose as much as 9 basis points following the hike, retreated entirely to continue trading down 5 bps on the day at 8.72 percent.
"For now, this should mark the peak of the rate hike cycle, with the central bank's growth projections close to our conservative estimates at 4.8 percent for FY14 and 5.3 percent for FY15," said Radhika Rao, economist at DBS Bank in Singapore.
The CPI eased to a three-month low of 9.87 percent in December but remains well above the central bank's policy repo rate of 7.75 percent, and the RBI said on Tuesday that consumer inflation risks remain to the upside.
Last week, a central bank panel proposed revamping its monetary policy structure by setting a CPI inflation target of 4 percent, plus or minus 2 percent, over the long term, with a goal of trimming