(RTTNews) - The Reserve Bank of India announced on Tuesday that it was raising its repo rate, the rate at which it lends funds to commercial banks, to 8.5 percent from the current 8.0 percent with immediate effect.

Further, the RBI also announced a two-stage hike of the Cash Reserve Ratio, which is the amount banks must hold in reserve, by 50 bps to 8.75%.

According to the RBI, the CRR will be hiked by 25 basis points to 8.50 percent effective from July 5, and by another 25 basis points to 8.75 percent on July 19.

This is the Reserve Bank’s second hike of its benchmark interest rate for the month and comes after inflation accelerated to a 13-year high in early June after the government increased state-set fuel prices at the start of the month.

“At this juncture, the overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations,” the bank said in the statement announcing the hike.

India’s inflation, based on the wholesale price index, recorded a double digit rate of 11.05% for the week ended June 7, jumping from a 7-year high of 8.75% recorded in the week before, largely on costlier oil, metals and food.

“Relative to several other emerging economies, the Indian economy has, by and large, a reasonable supply-demand balance which provides some insulation in managing this unprecedented shock from global oil markets,” the statement added.

Earlier in the month, the Reserve Bank had hiked its key lending rate by 25 basis points to 8%, keeping all other policy rates unchanged. The RBI’s next policy review is on July 29.

The RBI’s moves to reign in the inflation comes as India’s economy is expanding at a robust pace, with the country achieving a Gross Domestic Product growth rate of over nine per cent in the past three years. However, economists are predicting a moderation in growth during the current fiscal.

India’s Planning Commission Deputy Chairman Montek Singh Ahluwalia said on Tuesday the growth momentum can be maintained at the current 9%, even with current level of oil prices.

Also on Tuesday, US Federal Reserve’s Open Market Committee is meeting for a two-day monetary policy meeting, at which the Fed’s policymakers, under Ben Bernanke, the Chairman, are expected to leave the interest rates unchanged at 2.0 percent. Nevertheless, they are expected to talk tough on inflation.

However, analysts expect the European Central Bank to proceed with a quarter-point rate hike during the Governing Council meeting of the ECB in Frankfurt on July 3, aimed at controlling soaring inflation brought about by global oil and food price increases.

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