In a move to checkmate rising inflation, the Reserve Bank of India (RBI) on Tuesday hiked interest rates by 0.25 percentage points for the second time in a little over a month. Consequently, the policy repo rate, or the rate at which banks borrow from the RBI, will go up to 7.75 per cent from 7.50 per cent earlier.

“With the more recent upturn of inflation and with inflation expectations remaining elevated… it is important to break the spiral of rising price pressures,” Governor Raghuram Rajan said, announcing the second quarter review of the monetary policy for the current financial year.

Simultaneously, the central bank reduced the Marginal Standing Facility rate, which is the rate at which banks borrow funds overnight from the RBI, from 9 to 8.75 per cent. This, along with the central bank’s decision to increase the short-term 7 and 14-day borrowing limits for banks, is likely to ease liquidity pressure, and also bring down the cost of funds for banks.

Borrowers and depositors will have to wait as banks take stock of the policy to decide on adjusting retail lending and deposit rates. The monetary policy stance of the RBI, though not hawkish, still hints at further tightening of rates if inflation does not fall in line.

State Bank of India Chairperson Arundhati Bhattacharya said some rate changes could be expected but the bank would decide after its Asset Liability Committee meets next week.

The RBI also lowered its expected GDP growth to 5 per cent for this fiscal from 5.5 per cent earlier. “The revival of large stalled projects and the pipeline cleared by the Cabinet Committee on Investment may buoy investment and overall activity towards the close of the year,” Dr. Rajan noted.

On the external sector, Dr. Rajan said a perceptible narrowing of the trade deficit, coupled with policy interventions, had brought some calm to the foreign exchange market. But he said normalcy was yet to be restored, though the RBI is comfortable with the current exchange rate of the rupee, which is hovering around 61-62 per dollar.

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