India's new central bank governor marked his first policy meeting Friday with a bold decision to hike interest rates, wrong-footing analysts and leading to sharp falls on the stock market.
India's new Reserve Bank of India governor has raised interest rates by 25 basis points on Friday in a surprise move during his first monetary policy review in a bid to reduce inflation.
Reserve Bank of India (RBI) chief Raghuram Rajan, who had warned he was prepared to be unpopular, ordered a rise in the benchmark interest rate from 7.25 to 7.50 percent at a mid-quarter policy review in India's financial centre Mumbai.
The Bombay Stock Exchange Sensex index fell 2.16 percent afterwards to 20,199.79 points and the rupee fell to 62.39 against the dollar from its previous close of 61.77.
"Bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately," Rajan said.
Rajan had been widely forecast by economists to keep rates on hold despite annual inflation hitting an unexpected six-month high of 6.1 percent this week.
While businesses and the government would like a rate cut to help revive sluggish growth, this would risk pushing inflation higher and further weakening the rupee, which hit record lows in the weeks before Rajan took charge on September 4.