India's central bank surprised investors Tuesday by raising a key interest rate to 8% to tackle rising prices in the face of emerging market turmoil.
Citing economic uncertainty in China, Europe and Japan, the bank's governors said that financial market contagion "is a clear potential risk."
"Notwithstanding the boost from stronger external demand, uncertainty continues to surround the prospects for some emerging economies," the bank said in a statement.
The bank also said it did not expect further policy tightening, signaling that rates may now have reached their peak. Inflation is currently running at around 10% in the country.
"The RBI clearly wants to see inflation, particularly consumer price inflation, fall a good deal further," said Daniel Martin of Capital Economics.
Emerging markets have been hammered in recent days on fears that a reduced flow of cheap money from the Federal Reserve will lead to a flight of cash from weaker economies. Signs of a slowdown in China's huge manufacturing sector and problems in its shadow banking system have only added to worries.
Developing markets got a major boost from of low interest rates in the United States, which encouraged a rush of capital into the developing world. Should rates rise and that trend reverse, vulnerable economies could take a hit as their currencies weaken and investors flee.