India's central bank hiked its key interest rate by 25 basis points on Tuesday in a surprise move aimed at taming inflation, which remains above the bank's comfort level.
After a meeting in the financial capital Mumbai, the Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would rise to 8.0 percent.
Several economists had predicted that rates would be kept on hold after the widely watched Wholesale Price Inflation index fell to 6.16 percent in December from a year earlier, down sharply from 7.52 percent the previous month.
But a statement from RBI governor Raghuram Rajan said pressure on inflation remains from economic factors such as the rising prices of services.
"It is critical to address these risks to the inflation outlook resolutely in order to stabilise and anchor inflation expectations, even while recognising the economy is weak and substantial fiscal tightening is likely in Q4 (January to March)," he said.
While business leaders have been clamouring for a rates cut to boost growth and spur investment, such a reduction would also pile pressure on the rupee, which sank Monday to its weakest level in over two months.
The RBI under Rajan raised rates in both September and October in a determined bid to fight inflation, but the bank then surprised markets by holding rates in December even after inflation accelerated to a 14-month peak.