India's central bank on Friday surprised markets with an inter-meeting rate increase by raising key policy rates by 25 basis points citing rising inflation pressure and robust growth. The Reserve Bank of India (RBI) increased the repo rate, the rate at which it lends to banks to 5.00 percent and reverse repo rate, the rate which it absorbs funds from the system to 3.50 percent with immediate effect.
"Given the lags in monetary policy, it is better to respond in a timely manner, even if it is outside the scheduled policy reviews, than take stronger measures at a later stage when inflationary expectations have accentuated," the RBI said. Low policy rates can complicate the inflation outlook and impair inflationary expectations, particularly given the recent escalation in non-food manufactured products, the RBI said.
"The Reserve Bank will continue to monitor macroeconomic conditions, particularly the price situation, and take further action as warranted," the central bank said in a statement. India is the second major economy after Australia to start raising interest rates with signs of global recovery emerging and local price pressures picking up. China, meanwhile, has raised its banks' reserve requirements but has left its rates unchanged.
Most analysts and market participants were expecting the RBI to increase interest rates by 50 basis points at its next scheduled meeting on April 20. The wholesale price index in Asia's third-largest economy accelerated to 9.89 percent in February, the highest since October 2008 and well above the central bank's end-March projection of 8.5 percent and the 8.56 percent January reading.