MUMBAI, June 24: India’s central bank unleashed a fresh round of monetary tightening on Tuesday, raising its key short-term lending rate by half-a-percentage point after inflation hit a 13-year high of over 11 per cent.

The Reserve Bank of India raised its repo rate at which commercial banks borrow funds from the central bank to 8.5 per cent from 8.0 per cent effective immediately.

It also announced a two-stage hike of the Cash Reserve Ratio, or the amount of cash banks must hold in reserve, by 25 basis points to 8.50 per cent effective July 5, and by another 25 basis points to 8.75 per cent on July 19.

The RBI kept its key short-term borrowing rate, or the reverse repo rate, unchanged at six per cent.

“Monetary policy has to urgently address aggregate demand pressures, which appear to be strongly in evidence,” the central bank said in a statement.

Inflation in Asia’s third-largest economy rose to a 13-year high of 11.05 per cent in the week ended June 7, well above the RBI’s declared comfort level of 5.5 per cent.

“This is an extreme step,” Apurva Shah, head of research with brokerage Prabhudas Lilladher, said of the latest round of rate hikes.

“But the RBI was probably concerned that inflation would not go off in a hurry as oil prices remain stubborn at above the 135-dollar mark. We expect the markets to react negatively on Wednesday to the news,” he said.

Price rises driven by increased food and fuel costs have caused intense hardship for India’s poor masses.

The ruling Congress-led coalition government fears a voter backlash with general elections due by May 2009 at the latest.—AFP