India Unexpectedly Raises Interest Rate

To battle inflation near double digits, Reserve Bank of India raises repurchase rate by 25 bps; may be first in a series of substantial increases.

India’s central bank unexpectedly raised its key interest rate, signaling it’s ready to implement the most sweeping changes in its 78-year history to fight the fastest consumer-price gains in Asia.

Governor Raghuram Rajan boosted the repurchase rate to 8 percent from 7.75 percent, the Reserve Bank of India (RBI) said today. Only three of 45 analysts in a Bloomberg News survey predicted the move, with the rest expecting no change. It came five days after Finance Minister Palaniappan Chidambaram offered a reminder that the central bank has a duty to help growth.

Chidambaram called the inflation target “ambitious” in an interview last week and said the RBI must retain the objective to support growth even as it battles inflation. The panel also suggested that the government cut the fiscal deficit to 3 percent of gross domestic product by March 2017, a target Chidambaram shares.

If inflation slows, Asia’s third-biggest economy can grow between 5 percent and 6 percent in the next fiscal year, ending March 2015, according to the statement. Gross domestic product will expand “a little below” 5 percent in the year through March 31, it said.

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