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Reserve Bank of India raises its repo rate

Sept. 20, 2013 at 10:28 AM   |   Comments

MUMBAI, Sept. 20 (UPI) -- India's Sensex stock index shed 1.9 percent Friday after the Reserve Bank of India announced it would raise its key interest rate to 7.5 percent.

The increase of a quarter percentage point in the so-called repo rate also hit the rupee, which moved 1 percent lower. Bond prices fell, which pushed to benchmark 10-year bond rate to 8.58 percent, up from Thursday's close at 8.19 percent, The Wall Street Journal reported Friday.

The rupee had made gains of 8 percent against the U.S. dollar this month, after dropping 18 percent against the dollar from May through August, bottoming out at a record 68.80 before its September comeback.

The central bank's policy shift is aimed at slowing inflation.

The country's key price gauge is the wholesale price index, which rose 6.1 percent in August from August 2012. The RBI's target rate for inflation is 5 percent or less, the Journal said.

"To the extent that we can anchor inflationary expectations, we can create a sense of stability in the value of the currency, [and] the economy is actually better off from a growth perspective," said Raghuram Rajan, a former International Monetary Fund economist, Friday after his first RBI policy meeting as the bank's new governor.

Many analysts had expected the bank to keep its lending rate intact to support growth. The country's gross domestic product is expected to grow 5 percent in 2013, the slowest in a decade.

But with inflation as the bank's first concern, "a further increase in repo rates is not ruled out," Ajay Bodke, head of investment strategy at Mumbai brokerage Prabhudas Lilladher Pvt. Ltd, told the Journal.

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