The Reserve Bank of India unexpectedly raised its policy interest rate by 25 basis points today but rolled-back some of the measures it had implemented to support the battered rupee.
In his first monetary policy review since taking office on September 4, RBI Governor Raghuram Rajan increased the repo rate by 25 basis points to 7.5%.
Economists had widely expected India's central bank to leave the repo rate unchanged.
However, he reduced the marginal standing facility (MSF) rate by 75 basis points to 9.5%. The RBI had lifted the MSF to 10.25% in the middle of July to stabilise a declining rupee.
India's headline inflation shot to a six-month high of 6.1% in August, hardening the case for Rajan to keep interest rates high.
India's record-high current account deficit made it especially vulnerable to the flight of funds from emerging markets that began in May on expectations the Fed would soon begin tapering its extraordinary stimulus.
Since Rajan took office, the rupee had recovered more than 9% up until yesterday, getting a further boost this week after the US Federal Reserve unexpectedly opted not to begin scaling back its stimulus programme.
Rajan said today that domestic drivers of the rupee now take precedence. "The focus has turned to internal determinants of the value of the rupee, primarily the fiscal deficit and domestic inflation," he said.