Reserve Bank of India on Tuesday raised key interest rates by 25 basis points, as expected, tightening policy for the second month in a row as inflation heads towards double digits.
The Reserve Bank of India also raised its cash reserve ratio (CRR) requirement for banks by 25 basis points, as expected, in a move to drain further liquidity from the financial system.
India last month became the second Group of 20 economy after Australia, to raise policy interest rates as the world economy recovers from it worst downturn in decades. The central bank surprised markets by raising rates by 25 basis points ahead of this month's scheduled quarterly policy review.
Asia's third-largest economy is set to grow at 8.5 percent in the current financial year and 9 percent the following year, and inflation is spreading beyond food to fuel and manufactured goods such as cars. March annual inflation reached 9.9 percent, its highest in 17 months.
The central bank lifted the reverse repo rate, at which it absorbs excess cash from the banking system, by 25 basis points to 3.75 percent. It increased the repo rate, at which it lends to banks, by 25 basis points to 5.25 percent.
It raised the reserve requirement for banks by 25 basis points to 6.00 percent.
"With the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalising our policy instruments," RBI Governor Duvvuri Subbarao said in the policy statement.