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The Reserve Bank of India (RBI) repo rate – the rate at which the central bank lends to commercial banks – was increased by 0.25 per cent to 7.75 per cent.
The central bank kept its Cash Reserve Ratio (CRR) – the proportion of money that commercial banks must keep with the central bank – unchanged at four per cent.
“Overall WPI [wholesale price index] inflation is expected to remain higher than current levels through most of the remaining part of the year, warranting an appropriate policy response,” RBI Governor Raghuram Rajan said on Tuesday in a statement.
India’s wholesale inflation stood at 6.46 per cent in September.
The bank also cut its marginal standing facility (MSF) rate by 0.25 per cent to 9.25 per cent. MSF is a window for banks to borrow from the RBI.
The MSF rate was raised in July to support the slumping rupee.
The new central bank governor surprised markets by raising interest rates in his first monetary policy meeting last month.
Rajan was previously a chief economist at the International Monetary Fund (IMF).
The RBI expects the economy to grow at five per cent in the current fiscal year ending in March.
India’s Finance Minister Palaniappan Chidambaram earlier this month criticised the IMF for its growth projections for India.
“I know that the World Economic Outlook report does not share my optimism, but I may tell you that we do not share their pessimism,” Chidambaram said in Washington.
The IMF slashed its forecast for global developing economies by 0.5 per cent to 4.5 per cent this year in its latest World Economic Outlook, and by 0.4 per cent to 5.1 per cent next year.