India's central bank hikes key interest rate

MUMBAI (AFP) - India's new central bank governor hiked the key interest rate on Tuesday for a second month running, disregarding calls for lower borrowing costs as he remains focused on battling high inflation.

After its monetary policy meeting in the financial capital Mumbai, the Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would be hiked by 25 basis points to 7.75 percent.

"The policy stance and measures... are intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth," bank chief Raghuram Rajan said in a statement.

Most economists had predicted the hike by Mr Rajan as wholesale inflation has been above the RBI's comfort zone of 5.0 percent for four successive months.

India's annual inflation jumped to a seven-month-high of 6.46 percent for the month of September, led by surging food and fuel prices.

After taking office in September, Mr Rajan - who had warned he was prepared to take unpopular steps to bring the economy back on track - surprised markets by hiking interest rates in his first monetary policy meeting.

At his second such meeting on Tuesday, the bank also kept the cash reserve ratio - the percentage of deposits banks must keep with the central bank - unchanged at 4.0 percent.

Mr Rajan did, however, relax some liquidity tightening measures introduced by the RBI in July to try and help stem the rupee's freefall.

The marginal standing facility - used to lend to commercial banks when there is a shortage of funds in the market - was cut by 25 basis points to 8.75 percent.

The central bank is under pressure from businesses to ease interest rates to spur growth in Asia's third-largest economy, which is running at a decade low of five percent.

A rise in interest rates dampens business sentiment by increasing borrowing costs for the economy and pushing banks to raise their rates on loans for property and cars.

Despite improvements in investor sentiment and a strengthening of the rupee since Rajan took charge, the bank warned on Monday night that anchoring inflation expectations would be key to monetary policy.

"It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth," Mr Rajan added in Tuesday's announcement.

"The Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics," he added.

Indian shares were up 0.20 percent to 20,611.27 points after the bank's decision.

Huge expectations have been riding on Mr Rajan, a former International Monetary Fund chief economist nicknamed "The Guv", since he came to office in a period of economic turmoil.

The rupee has gained ground from record lows since he took charge and announced steps to increase foreign capital flows into the country and bolster foreign exchange reserves.

The scandal-tainted Congress-led government of Prime Minister Manmohan Singh is anxious to tame inflation and revive the economy as it seeks a third term in office, with elections due by May 2014.