RBI hikes repo rate in a surprise move

The Reserve Bank of India (RBI) on Tuesday unexpectedly raised its policy interest rate by 25 basis points to 8 percent.

The policy decision was driven by an expectation that consumer price index (CPI) inflation will remain high, an indication that the RBI is looking to adopt a recent proposal to base its policy rate decisions on a CPI target.

"Today on the basis of an assessment of the current and evolving macro-economic situation, we have decided to increase the policy repo rate under the liquidity adjustment facility by 25 basis points to eight percent," said RBI Governor Raghuram Rajan.

Indian bonds, stocks and the rupee fell after the rate hike but soon recovered most losses.

Rajan added that the current account deficit for 2013-14 is likely to be below 2.5 percent of GDP (Gross Domestic Product) as compared to the previous year.

"The current account deficit for 2013-14 is now expected to be below 2.5 percent of GDP (Gross Domestic Product) as compared with 4.8 percent in 2012-13. The recent resumption of capital inflows with some turbulence should help finance the current account deficit comfortably," added Rajan.

Rajan faces the daunting challenge of reviving an economy growing at a decade low of around 5 percent while battling persistently rising prices, much of which has been fuelled by supply-side shortages beyond the control of monetary policy.