RBI raises key interest rates by 25 basis points

The Reserve Bank of India (RBI) raised key interest rates on Tuesday by a quarter point each, as expected, in a bid to clamp down on resurgent inflation and warned that higher food prices could become entrenched if steps to boost output are not taken.

The RBI raised its repo rate, at which it lends to banks, to 6.5% from 6.25%. It lifted the reverse repo rate, at which it borrows from banks, to 5.5% from 5.25%.

The increase in key rates was the seventh since March, and while the 25 basis point rises were expected, a growing number of analysts had said in recent days that a 50 basis point increase was needed.

"As high food inflation persists, the prospect of it spilling over to the general inflation process is rapidly becoming a reality," Reserve Bank of India (RBI) governor Duvvuri Subbarao said in the policy document.         

A recent Reuters poll of economists had forecast the central bank would raise key rates by a quarter point on Tuesday, and 75 basis points in total during 2011.

The wholesale price index, the most widely watched gauge of prices in India, rose 8.43% in December from a year earlier, compared with 7.48% in November.

The RBI on Tuesday lifted its headline inflation projection for March 2011 to 7% from 5.5% previously, and said it expected inflation to begin moderating again in the first quarter of the fiscal year that starts in April.

The central bank stuck with its 8.5% GDP growth forecast for the current fiscal year, but with an upside bias.