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RBI's new governor Raghuram Rajan today bit the bullet by hiking the repo rate by 25 basis points to 7.5%. Economists had widely expected the RBI to leave the repo rate unchanged.
The central bank, however, reduced the Marginal Standing Facility (MSF) rate by 75 basis points to 9.5%.
The reverse repo rate stands adjusted at 6.5%.
RBI also reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 99% of the requirement to 95% effective from the fortnight beginning September 21, while keeping the CRR unchanged at 4%.
Rajan said that RBI will lower its MSF rate by more than any hike it makes in the policy repo rate in order to reduce the gap between them to 100 basis points.
He added that the hike in the key policy repo rate cannot be immediately viewed as negative for growth.
The repo rate hike affects 0.5% of the entire borrowing of the banking system, he said.
"The need to anchor inflation and inflation expectations has to be set against the fragile state of the industrial sector and urban demand. Keeping all this in view, bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately," Rajan said in the mid-quarter policy review statement.
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Driven by costlier food items, wholesale price inflation rose to a six-month high of 6.1% in August.
He also said he wanted the repo rate to resume its place as the operational policy rate as the rupee support measures are unwound.
The central bank said it is now possible to contemplate easing exceptional cash tightening measures in a calibrated manner.
Rajan said he was confident that the current account deficit could be financed this year without suffering a substantial drawdown in foreign exchange reserves.
He added that he does not anticipate a new set of rupee stabilising measures since the US Fed had decided to postpone tapering its bond buying program.
The RBI would slowly taper-off the special foreign exchange swap window instituted for oil marketing companies when economic conditions improve.
