Economists were largely expecting a hike in the repo rate to battle inflation, which for November came in at a hugely elevated level of 11.24% (CPI inflation). Repo rates are rates at which the Reserve Bank of India lends money to banks and any hike in these rates signals a hike in deposit and lending rates by banks.
"Recent readings suggest that headline inflation, both retail and wholesale, have increased, mainly on account of food prices. While CPI and wholesale price index (WPI) inflation excluding food and fuel have been stable, despite a steady and necessary increase in administered prices towards market levels, the high level of CPI inflation excluding food and fuel leaves no room for complacency. There is, however, reason to wait before determining the course of monetary policy. There are indications that vegetable prices may be turning down sharply, although trading mark-ups could impede the full pass-through into retail inflation. In addition, the disinflationary impact of recent exchange rate stability should play out into prices. Finally, the negative output gap, including the recent observed slowdown in services growth, as well as the lagged effects of effective monetary tightening since July, should help contain inflation," the RBI has stated.
The Indian equity markets surged following the hike, while the rupee did not show any huge volatility.However, it gave up gains that there could be an interest rate hike even off-policy.
"If the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall, the Reserve Bank will act, including on off-policy dates if warranted, so that inflation expectations stabilise and an environment conducive to sustainable growth takes hold. The Reserve Bank's policy action on those dates will be appropriately calibrated," the RBI has stated.