RBI hikes repo rate 25 bps, hawkish Raghuram Rajan cites 'inflation', trims Indian rupee norms

Raghuram Rajan's RBI sprang a surprise on the world and continued with D Subbarao's hawkish policies. Reuters

Raghuram Rajan's RBI sprang a surprise on the world by turning hawkish during the monetary policy review meet that was hyped up significantly in recent weeks, but ultimately the cbank continued with D Subbarao's much-maligned policies with an interest rate hike - RBI hiked short-term lending (repo) rate by 0.25 per cent to 7.5 per cent.

Raghuram Rajan however, said the hike made Friday in the key policy repo rate cannot be immediately viewed as negative for economic growth.

He added that the repo rate hike affects 0.5 percent of the entire borrowing of the banking system.

A hawkish RBI unexpectedly raised the policy rate as it kept its focus on controlling inflation, which it felt would be above the expected levels in the current fiscal.

Read Full Report: Raghuram Rajan's mid-quarter monetary policy review

Read Full Statement: Raghuram Rajan's mid-quarter monetary policy review

RBI Governor Raghuram Rajan in his maiden policy review, however, eased liquidity through a reduction in the marginal standing facility (MSF) rate, at which banks borrow from the central bank, by 0.75 per cent to 9.5 per cent.

The repo rate or the short term lending rate has been increased by 25 basis points to 7.5 per cent from 7.25 per cent with immediate effect.

The stock markets reacted negatively, with the BSE Sensextanking by about 500 points while the rupee depreciated 69 paise to 62.46 against the dollar.

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"The need to anchor inflation and inflation expectations has to be set against the fragile state of the industrial sector and urban demand. Keeping all this in view, bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately," Raghuram Rajan said in the mid-quarter policy review statement.