July 27 (Reuters) – India’s central bank raised interest rates more forcefully than expected on Tuesday in the face of inflation that has held stubbornly above 10 percent for the past five months.
The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 percent, which was in line with expectations, but raised the reverse repo rate, at which it absorbs excess cash from the system, by 50 basis points to 4.50 percent.
Economists and investors had expected a 25 basis point increase in the reverse repo rate.
As expected, it left the cash reserve ratio (CRR) for banks at 6.00 percent, amid ongoing tight liquidity in the banking system.
Inflation in India emerged last year in the wake of a poor monsoon that drove up food prices but has spread broadly throughout the economy, spawning protest against a government whose voter base is predominantly poor and rural.
New Delhi’s decision to increase fuel prices is expected to add nearly a percentage point to wholesale price index (WPI) inflation starting in July and led the opposition to call a one-day nationwide strike early this month.
The government is counting on normal summer monsoon rains to results in better crop yields and ease pressure on food prices, and has said inflation should decline to 6 percent by December, a figure private economists put closer to 8 percent. (Reporting by Tony Munroe)