By Swati Bhat and Sudipto Ganguly

MUMBAI (Reuters) – The Reserve Bank of India hiked its key repo rate by 25 basis points on Wednesday as expected but surprised markets by leaving the door open to more tightening, saying core inflation remained high.

The central bank said that its policy stance remains focused on the withdrawal of accommodation, with four out of six members voting in favour of that position.

Most analysts had expected a hike on Wednesday to be the final increase in the RBI’s current tightening cycle, which has seen it raise rates by 250 bps since May last year.

GRAPHIC: India’s monetary tightening continues – https://www.reuters.com/graphics/INDIA-ECONOMY/RATES/egpbyaqmovq/chart.png

The monetary policy committee (MPC), comprising three members from the central bank and three external members, raised the key lending rate or the repo rate to 6.50% in a split decision.

Four of the six members voted in favour of the move.

“The stickiness of core or underlying inflation is a matter of concern. We need to see a decisive moderation in inflation. We have to remain unwavering in our commitment to bring down CPI headline inflation,” RBI Governor Shaktikanta Das said, while announcing the committee’s decision.

In a poll conducted ahead of the federal budget on Feb. 1, more than three-quarters of economists, 40 of 52, had expected the RBI to raise the repo rate by 25 bps. The remaining 12 predicted no change.

Das said that the inflation-adjusted, real interest rate remains below the pre-pandemic levels and liquidity remains surplus, even though it is lower than during the pandemic.

GRAPHIC: India Real Interest Rates Settle At Well-Below Peak – https://www.reuters.com/graphics/INDIA-CENBANK/lgvdknxjapo/chart.png

India’s annual retail inflation rate eased to 5.72% in December from 5.88% in the previous month, falling below the RBI’s upper tolerance band of 2%-6% for a second straight month, though core inflation, which excludes more volatile food and fuel prices, was still running at 6.1%.

Consumer inflation is projected to be at 6.5% in the fiscal year 2023 and 5.3% for the fiscal year 2024.

“Going ahead, as inflation begins to moderate we expect real rates to reach near pre-pandemic (levels) soon and hence the need for incremental rate hikes remains limited. We expect a prolonged pause on rates with a likely shift in stance in the coming April policy,” Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said.

Das added that the Indian economy looks resilient even though considerable uncertainties remain on global commodity prices. The RBI has projected a growth rate of 6.4% for FY24.

“The global economic outlook does not look as grim now as it did a few months ago. Growth prospects in major economies have improved, while inflation is on a descent though still remains well-above target in major economies. The situation remains fluid and uncertain,” Das said.

The Indian rupee was little changed to the U.S. dollar at 82.68 compared with 82.67 prior to the policy announcement. It briefly rose to 82.62 after RBI maintained its withdrawal of accommodation stance.

The benchmark bond yield was at 7.3346% against 7.3124% before the policy decision and the previous close of 7.3102%.

The Nifty 50 index was up 0.68% at 17,842.50, as of 10:39 a.m. IST, while the S&P rose 0.6% to 60,649.85.