* RBI raises key repo rate by 25 bps to 8 pct
* RBI says further tightening unlikely in near term if CPI
* RBI adopts panel recommendation to review policy every 2
(Updates with details, comments)
By Suvashree Dey Choudhury and Tony Munroe
MUMBAI, Jan 28 India surprisingly raised
interest rates on Tuesday to dampen inflation, saying it was now
better prepared to deal with the risk of major capital outflows
roiling emerging economies.
The Reserve Bank of India (RBI), however, said that if
retail inflation eases as projected, it does not foresee further
near-term monetary policy tightening.
India's rupee sank 11 percent last year as emerging
markets sold off sharply after the U.S. central bank announced
it would taper its aggressive bond-buying programme that had
fuelled global demand for risk assets.
Expectations the Federal Reserve will further scale back
stimulus this week have renewed pressure on emerging economies
although the rupee has fared better than other currencies this
time. Turkey's central bank was expected to raise rates to
defend the lira at an emergency meeting later on Tuesday.
India's 25-basis-point rate hike was driven by expectations
of high but moderating consumer price index (CPI)
inflation, an indication the central bank intends to adopt a
recent proposal to base its rate decisions on a CPI target.
RBI Governor Raghuram Rajan faces the daunting challenge of
reviving an economy growing at its slowest in a decade while
battling stubbornly rising prices, especially for food, fuelled
by supply-side shortages beyond the control of monetary policy.
HSBC economist Leif Eskesen expects more rate increases from
"This was the right decision, but it does not constitute the
end to the tightening cycle, in our view. If RBI wants to knock
out core inflation, the policy rate will likely have to be hiked
The RBI raised its policy repo rate to 8.00
percent amid market worries over slowing growth in China and the
prospect of further tapering of U.S. stimulus.
"We have injected some medicine, 75 bps in rate hikes since
September, and we have to watch to see how that medicine works
along with, again, the weak state of the economy as well as the
stabilisation of the rupee," Rajan told a news briefing.
Lifting rates lends support to an Indian currency which
strengthened slightly on Tuesday.
The Indian economy, which not long ago aspired to
double-digit growth, has been weakened by sluggish investment
and persistent inflation in recent years under the
corruption-scandal battered Congress party government of
Manmohan Singh, which faces an uphill battle in elections due by
Most economists in a Reuters poll last week had expected no
change in rates. However, expectations for a rate hike had
increased after a central bank panel proposed to make CPI the
main inflation benchmark.
"For now, this should mark the peak of the rate hike cycle,
with the central bank's growth projections close to our
conservative estimates," said Radhika Rao, economist at DBS Bank
The RBI said economic growth was likely to fall short of its
earlier projection of 5 percent this fiscal year and improve to
5-6 percent in the year that starts in April.
The CPI eased to a three-month low of 9.87 percent in
December, well above the wholesale price index (WPI)
, long the RBI's main price barometer, which slowed
to 6.16 percent in December.
Indian bonds, stocks and the rupee fell after the rate
increase but recovered most losses due to a statement seen as
dovish, although the RBI said that consumer inflation risks
remain to the upside.
The benchmark 10-year bond yield rose as much
as 13 basis points after the hike before retreating.
Last week, a central bank panel proposed revamping its
policymaking structure by setting a long-term CPI inflation
target of 4 percent, plus or minus 2 percent. In the
intermediate term, the goal would be to trim CPI to 8 percent by
January 2015 and 6 percent by January 2016.
"An increase in the policy rate...will set the economy
securely on the recommended disinflationary path," the RBI said.
"If the disinflationary process evolves according to this
baseline projection, further policy tightening in the near term
is not anticipated at this juncture," it said.
Rajan, who took office in early September, adopted the
panel's recommendation to review monetary policy every two
months. It had been reviewing policy eight times a year.
The RBI said CPI inflation was likely to stay above 9
percent during the final quarter of the fiscal year that ends in
March, ranging between 7.5 percent and 8.5 percent for the
quarter that ends in March 2015, "with the balance of risks
tilted on the upside."
(Additional reporting by Swati Bhat, Neha Dasgupta and Subhadip
Sircar; Editing by Jacqueline Wong)