In a move, which surprised the markets, Reserve Bank of India raised the repo and reverse repo rate after market hours yesterday. The rate hike was least expected, especially when the stock markets have seen a severe fall.

Reverse repo rate, or the rate at which RBI borrows from the markets to suck out liquidity, has been hiked by 25 basis points from 5.50 per cent to 5.75 per cent.

Repo rate, or the RBI lending rate to infuse liquidity into the markets, has also been increased by 25 basis points to 6.75 per cent from 6.50 per cent earlier. The spread between the repo and reverse repo rates have been kept stable at 100 basis points.

Bank rate, used as a benchmark rate for fixing interest rates of commercial loans, has been left unchanged at 6 per cent per annum.

The short statement from RBI said the hike is after a "review of current macroeconomic and overall monetary conditions".

The RBI had left interest rates unchanged in the annual review of monetary policy in April, surprising most economists who were expecting a 25 basis point hike. The consensus view was that the central bank had fallen behind the curve as inflationary pressures continued to rise.

Inflation has been rising steadily and stood at 4.74 per cent for the week ended 20 May. With the recent fuel price hike, inflation would easily cross 5 per cent and maybe even cross 5.5 per cent. RBI's target inflation range for the current financial year is 5.00 to 5.50 per cent.

So in a sense the RBI was pushed into a rate hike by the fuel price increase, without waiting for the quarterly review next month. In doing so, the RBI is following global trends. The European Central Bank and central banks of countries like South Korea, Thailand and Turkey have raised interest rates recently.