Reserve Bank of India (RBI) Governor Raghuram Rajan on Friday said that the repo rate has been hiked as inflation pressures remain high.
Stating that inflation and growth have always been a priority for the RBI, Rajan said the most immediate concern for the government is fiscal deficit.
"We will have to stabilise the economy regardless of what the US Fed does. If rupee stabilises we will be better prepared to handle tapering, told media while presenting his first monetary policy review after taking charge of his office earlier this month.
"Repo rate should be consistent with inflationary conditions in economy. Don't know what next move will be," he said.
"Repo rate will be in accordance with the inflation rate. RBI will focus on both WPI inflation as well as CPI inflation," he added.
Rajan further said WPI inflation will be higher than initially projected over the rest of the year in the absence of an appropriate policy response.
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"What is equally worrisome is that inflation at the retail level, measured by the CPI, has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence," he said.
The RBI Governor also said the timing and direction of further actions on exceptional measures will be contingent upon exchange market stability and can be two-way.
"Further actions need not be announced only on policy dates. However, any further change in the minimum daily maintenance of the CRR is not contemplated," he added.
In a surprise move, Rajan raised the repo rate by 25 basis points to 7.5 per cent. With this, the reverse repo rate, or the rate at which the RBI sucks out liquidity, stands revised at 6.5 per cent.
The RBI also revised the Marginal Standing Facility - the rate at which banks access funds for emergency needs - by 75 basis points to 9.5 per cent.
Former governor D. Subbarao had raised the MSF by 200 basis points in July as part of slew of cash tightening steps aimed at rescuing the rupee.
The cash reserve ratio, or the portion of deposits banks have to maintain with the central bank, stands unchanged at four per cent.