curb stubborn inflation in the country's booming economy.
The Reserve Bank of India raised its repo the rate at which it lends to commercial banks to 6.75 percent. The reverse repo the rate it pays banks for deposits was increased to 5.75 percent.
"The underlying inflationary pressures have accentuated, even as risks to growth are emerging," RBI governor Duvvuri Subbarao said in a statement after the bank's regular policy meeting in Mumbai.
Subbarao revised upward the bank's forecast for annual inflation for the current fiscal year ending March 31, 2011, to 8.0 percent from an earlier projection of 7.0 percent.
The latest rate hikes come as central banks across Asia in such countries as China, South Korea, Thailand and Vietnam have been tightening monetary policy to counter rising prices.
India's central bank has been the region's most aggressive in raising rates as the South Asian giant powers out of the financial downturn with growth projected at nine percent for the next fiscal year starting April 1.
Inflation has been one of the biggest problems for the Congress led government headed by Prime Minister Manmohan Singh, whose coalition is also reeling from a slew of corruption scandals.
Singh has called inflation a "serious threat" to India's economic growth.While food inflation has fallen from peaks of 20 percent in early 2010, it remains stubbornly high at 9.42 percent, according to data released Thursday, causing hardship and resentment among the public as it erodes purchasing power.
Poorer households, the backbone of the Congress party's support, have been specially hard hit by the rising cost of living.
Economists now also say that inflation, initially fuelled by spiralling food prices, has spilled over into the general economy, pushing up wages and other costs.
"Inflation is no longer a play on food prices it has somewhat rapidly become a more generalised phenomenon," said HDFC Bank chief economist Abheek Barua before the rate announcement.