India surprises with rate increase to battle inflation

India's central bank governor, Raghuram Rajan, surprised analysts by raising the benchmark interest rate in his first policy review, seeking to rein in inflation that has hurt the poor and dimmed economic prospects.

Rajan, who took office two weeks ago, boosted the repurchase rate by a quarter of a percentage point to 7.5 per cent, the first increase since 2011, the Reserve Bank of India said yesterday. All 36 analysts in a survey had predicted no change. While the RBI also relaxed liquidity curbs in the banking system, stocks, bonds and the rupee slid.

The decision suggests Rajan, a former International Monetary Fund chief economist, is determined to build the bank's inflation-fighting credentials, with the bump in borrowing costs coming amid the weakest economic growth since 2009. He acted even after the Federal Reserve's decision three days ago to maintain US monetary stimulus eased pressure on the rupee, which has tumbled since May.

"It shows their clarity and seriousness in dealing with elevated inflation," said Rajeev Malik, an economist at CLSA Asia-Pacific Markets in Singapore.

The rupee, which has gained 5.7 per cent this month, weakened 0.8 per cent in Mumbai. It has fallen about 11.5 per cent this year.

The RBI eased liquidity restrictions by cutting the marginal standing facility rate to 9.5 per cent from 10.25 per cent and lowering the daily balance requirement for the cash reserve ratio to 95 per cent from 99 per cent. The bank rate was reduced to 9.5 per cent from 10.25 per cent.

These steps started the process of a "cautious unwinding" of exceptional measures taken since July to reduce exchange-rate volatility, the central bank said. They also intend to address inflation risks to mitigate pressure on the rupee and create conditions for revitalising expansion.