MUMBAI, Sept. 20 (Xinhua) -- India's central bank, Reserve Bank of India(RBI), announced on Friday to raise repo rate by 25 basis points to 7.5 percent to combat the high inflation, as its newly appointed governor Raghuram Rajan surprised markets in his maiden policy review.
The repo rate, or the rate at which it lends to banks, now is increased to 7.5 percent from 7.25 percent.
"The need to anchor inflation and inflation expectations has to be set against the fragile state of the industrial sector and urban demand," Rajan said in his policy statement.
RBI reduced the marginal standing facility rate by 75 basis points to 9.5 percent from 10.25 percent with immediate effect. The measure was taken to tighten liquidity and arrest volatility in the foreign exchange market.
Since Rajan took office, the rupee had recovered more than 9 percent through Thursday, getting a further boost this week after the U.S. Federal Reserve unexpectedly opted not to begin scaling back its stimulus program.
Driven by costlier food items, wholesale price inflation rose to a six-month high of 6.1 per cent in August.
Rajan said WPI inflation will be higher than initially projected over the rest of the year in the absence of an appropriate policy response.
"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.
"Although better prospects of a robust kharif harvest will lead to some moderation in CPI inflation, there is no room for complacency," Rajan added.