In his maiden review of monetary policy, Reserve Bank of India (RBI) governor Raghuram Rajan surprised many with the rate hike on Friday. The apex bank governor raised the repo rate under the liquidity adjustment facility (LAF) by 25 basis points – up from 7.25 percent to 7.5 percent – with immediate effect.

“Recognising that inflationary pressures are mounting and determined to establish a nominal anchor which will allow us to preserve the internal value of the rupee, we have raised the repo rate by 25 basis points,” Rajan, who took charge in the first week of September, said in his statement issued in Mumbai.
Repo rate is the rate at which banks borrow short-term money from the RBI.

Explaining the rationale behind increasing the repo rate, Rajan said, “The intent here is that when the repo rate becomes the effective policy rate, it should be consistent with inflationary conditions in the economy. On net, these measures will reduce the cost of bank financing substantially while allowing us to take an appropriately precautionary stance on inflation,” he said. (Read Rajan’s full statement here).

The RBI governor also reduced the marginal standing facility (MSF) rate by 75 basis points – from 10.25 percent to 9.5 percent – with immediate effect. He reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 99 per cent of the requirement to 95 per cent effective from the fortnight beginning September 21, 2013, while keeping the CRR unchanged at 4.0 per cent.

But the market and India Inc, which welcomed his inaugural speech with enthusiasm, were not too enthused this time around. “The increase in repo rate by 25 basis points has come as a surprise to us.… A positive signal by way of a cut in the repo rate, which FICCI has been advocating for long, would have helped perk up sentiments,” said Naina Lal Kidwai, president of the industry chamber FICCI.

Confederation of Indian Industry, another industry body, also echoed the same sentiment. “The increase in repo rate could have been avoided as industry is already reeling under pressures of high cost of capital and low availability in a tight liquidity situation,” CII director general Chandrajit Banerjee said.

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