RBI shores up its anti-inflation credentials with surprise rate hike

NEW DELHI - Against expectations, the Reserve Bank of India (RBI) has lifted its benchmark repo rate by 25 basis points to 8.0%, flagging high core inflation pressures and the need to stabilise expectations. The decision, which follows a pause at its December policy meeting, brings the cumulative rate hikes to 75 basis points since September.

RBI noted that a policy rate hike was warranted with “aggregate demand pressures still imparting an upside to overall inflation'' and to achieve CPI inflation of below 8.0% by January 2015, in line with the recommendations of an expert panel that proposed to adopt a CPI inflation target as a nominal anchor for policy. Looking ahead, RBI's baseline projections reflect moderating inflation with no further policy tightening anticipated in the near term.

BBVA Bank says its base case forecast expects policy rates to stay stable at 8.0% over the first half of 2014, with scope for a 50 basis points policy easing in the second half amid weakening demand pressures and a softening inflation outlook. www.bbvaresearch.com (ATI).