India's central bank today raised interest rates for the second time in as many months.
It also warned that inflation is likely to remain elevated despite sluggish growth, and rolled back an emergency measure put in place in July to support the rupee.
The Reserve Bank of India (RBI) lifted its policy repo rate by 25 basis points to 7.75%, in line with expectations in a Reuters poll.
"Overall WPI (wholesale price index) inflation is expected to remain higher than current levels through most of the remaining part of the year, warranting an appropriate policy response," RBI Governor Raghuram Rajan said in his review.
As the rupee stabilised after a summer slide, the RBI as expected also lowered its Marginal Standing Facility (MSF) rate by a further 25 basis points to 8.75%, which eases liquidity in the banking system by lowering the cost of borrowing for lenders.
Rajan, a high-profile former chief economist at the International Monetary Fund, took office in early September and stunned markets in his first monetary policy review just weeks later by raising interest rates to combat fierce price pressures dogging Asia's third-largest economy.
Annual food inflation in India accelerated to 18.4% in September, its highest since mid-2010, pushed up by prices of vegetables including onions and stirring public discontent ahead of national elections which must be held by next May.
However, India's economy grew by just 4.4% in the June quarter, its slowest since early 2009. The 5% growth rate recorded in the last fiscal year through March was the weakest in a decade.
The RBI expects the economy again to grow at 5% in the current fiscal year that ends in March, below its earlier forecast of around 5.5% but still above many private-sector forecasts.
"The pass-through of rupee depreciation into prices of manufactured products is acting, along with elevated food and fuel inflation, to offset possible disinflationary effects of low growth," Rajan said in his policy statement.
The rupee slumped to record lows in August, at one point sliding some 20% for the year, on concerns about India's gaping current account and fiscal deficits, and as global investors dumped emerging market assets for fear the US Federal Reserve was set to start tapering its massive stimulus programme.
