MUMBAI, September 20, 2013 (AFP) – India’s new central bank governor marked his first policy meeting Friday with a bold decision to hike interest rates, wrong-footing analysts and leading to sharp falls on the stock market. Reserve Bank of India (RBI) chief Raghuram Rajan, who had warned he was prepared to be unpopular, ordered a rise in the benchmark interest rate from 7.25 to 7.50 percent at a mid-quarter policy review in India’s financial centre Mumbai.
The Bombay Stock Exchange Sensex index fell 2.16 percent afterwards to 20,199.79 points and the rupee fell to 62.39 against the dollar from its previous close of 61.77.
“Bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately,” Rajan said in a statement. Rajan had been widely forecast by economists to keep rates on hold despite annual inflation hitting an unexpected six-month high of 6.1 percent this week.
While businesses and the government would like a rate cut to help revive sluggish growth, this would risk pushing inflation higher and further weakening the rupee, which hit record lows in the weeks before Rajan took charge on September 4.