India’s central bank, the Reserve Bank of India, Tuesday hiked a key policy interest rate by 0.25 percent in less than two months to curb inflation and slumping of the rupee.
While it could help control inflation, which stands at more than 10 percent, the policy is also expected to make home, auto and other loans costlier as these items are considered a key locomotive of the Indian economy.
India’s economy is expected to grow at around 5 percent this fiscal year which ends March 2014.
In its second quarter review of the monetary policy for 2013-14, the central bank hiked repo rate, or repurchase rate, by 25 basis points or 0.25 percent to 7.75 percent.
“With the reduction of the MSF rate and the increase in the repo rate in this review, the process of re-aligning the interest rate corridor to normal monetary policy operations is now complete, ” central bank Governor Raghuram G. Rajan said in the policy statement.
This is the second time for India to raise interest rate in two months.
Rajan said the policy stance and measures in the review were intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth.
“These will help strengthen the environment for growth by fostering macroeconomic and financial stability. The Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics,” he said.
The central bank also withdrew an emergency measure to support the rupee, which has fallen 20 percent this year against the dollar.
Repo rate is the rate of interest that banks pay when they borrow money from the central bank to meet their short-term fund requirement.
The central bank had also hiked the repo rate by 0.25 percent in its previous review announced on Sept. 20. The Marginal Standing Facility (MSF) rate is reduced by 0.25 percent to 8.75 percent. The move will ease liquidity in the banking system.
MSF is a window for banks to borrow from the central bank.