Mumbai - India's central bank on Thursday raised its key short-term interest rates by 25 basis points - its 10th hike in 16 months - in a bid to tame high inflation stuck at "uncomfortable levels."
The Reserve Bank of India raised its repo rate - at which it lends to commercial banks - to 7.50% and increased the reverse repo - the rate it pays to banks for deposits - to 6.50%.
The repo rate is now at its highest since November 2008.
"Inflation persists at uncomfortable levels and much above our comfort zone," the RBI governor Duvvuri Subbarao said in a statement released after bank policymakers met in Mumbai.
The central bank decision came after data this week showed annual inflation accelerated to a higher-than-expected 9.06% in May, from 8.66% the previous month.
This is well above the RBI target of 5.0-6.0%.
Subbarao maintained a hawkish tone, saying a short-run slowdown in growth may be unavoidable as the bank maintains its "anti-inflationary" monetary policy stance.
Analysts had expected the increase and say further hikes are still likely in coming months.
India's Sensex opened lower before the meeting, as investors sold heavily in anticipation of a hike.
The benchmark 30-share index on the Bombay Stock Exchange was 0.45% lower in early afternoon trade after the announcement. Interest-sensitive banking, real estate and auto stocks in particular were under pressure.
The surge in the cost of living, triggered by spiralling food prices, rising global commodity prices and higher fuel costs, has been one of the biggest headaches for India's government.
Economists say inflation has now spilled over into the general economy, pushing up wages and other costs.
"The headline inflation rate remains extremely sticky at around the double-digit mark," said Robert Prior-Wandesforde, India and South East Asia Economics head at Credit Suisse.
Reducing prices has become a political priority for the Congress-led coalition in New Delhi, even as higher growth is seen as key to reducing crushing poverty in the nation of 1.2 billion.
The government has delayed a decision to rise prices of diesel and kerosene, which is widely used in rural areas and is seen as the "poor man's fuel".
A possible hike in diesel would stoke inflation further, as it is a widely used in the transport of goods and services across the country.
The RBI on Tuesday said inflation was likely to face continued "upward pressure" from the impact of high oil and coal prices, government subsidy expenditure and wage rises.
While inflation has remained stubbornly high, the series of rate hikes is starting to have an impact, with India's economic growth slowing to 7.8 percent in the three months to March - its weakest pace in five quarters.