The Reserve Bank of India (RBI) warned of both inflationary pressures and emerging risks to growth, after raising its short-term rates for the eighth time in the past 12 months.

"The RBI is concerned about the international events and commodity prices. Inflation still remains a big challenge. I would expect RBI to hike rates by another 25 basis points at the next review," said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services in Bangalore.

The central bank raised its forecast for headline inflation at the end of March to 8 percent, from its earlier 7 percent, and indicated it was likely to stay with its anti-inflationary stance.

The main stock index fell 1.14 percent, with mortgage lender Housing Development Finance Corp dropping 3.7 percent.

The benchmark five-year swap rate climbed as much as 11 basis points to 7.91 percent after the rate rise, while the one-year rate rose 7 basis points to 7.40 percent.

"The whole curve is likely to shift higher. I would prefer to stay paid in the short end. Inflation is still a concern," said Kumar Rachapudi, a fixed-income strategist at Barclays Capital in Singapore.

A Reuters poll this week had forecast the RBI would probably raise key rates by another 50 basis points in calendar 2011, including Thursday's hike.

The RBI raised the repo rate , its main lending rate, by 25 basis points to 6.75 percent, and raised the reverse repo rate , or borrowing rate, by 25 basis points to 5.75 percent , in line with the expectations in the poll.

The yield on the most-traded 8.08 percent 2022 rose 3 bps to 8.09 percent immediately after the policy, while the benchmark 10-year bond yield added 6 bps 7.97 percent.

"The market is not only moving due to the rate action, but also some balancing of position after the recent drop in bond yields and swap rates. I expect the 8.08 percent 2022 bond to be in 8-8.10 percent range by March-end," said R.V.S. Sridhar, president and head of markets, tresury at Axis Bank.

Bond volumes were moderate at 65.70 billion rupees ($1.5 billion) by 1030 GMT on the central bank's electronic trading platform.

"I am more concerned about the inflation. The RBI has revised its forecast to 8 percent by end March. That is the biggest worry. We are likely to see more rate hikes," said Pradeep Madhav, managing director at STCI Primary Dealer.

India's food inflation eased slightly to 9.42 percent in the year to March 5, data on Thursday showed, but the fuel price index surged to 12.79 percent from 9.48 percent a week earlier on higher coking coal prices.

Headline inflation unexpectedly quickened in February on rising fuel and manufacturing prices, data earlier this week had showed.

Manish Wadhawan, director and head of rates trading at HSBC India, said he expected another 25 bps rate rise.

"I don't expect bearishness in government bonds and swaps to materialise very heavily and markets will be mostly tracking liquidity and global developments," he said.

The rupee did not immediately react to the policy. However, it gradually started rising on hopes higher interest rates domestically would lure foreign funds into the country.