This is the eighth time since March 2010 the RBI has resorted to policy rate hike to tackle inflation, which is ruling above 8 per cent, much above the comfort level of 5-6 per cent.
In view of the rising fuel prices, following unrest in the middle-East and high food prices in the domestic market, the RBI has upped its March end inflation forecast to 8 per cent from 7 per cent projected earlier.
The short-term lending (repo) rate has been hiked to 6.75 per cent and the short-term borrowing (reverse repo) rate to 5.75 per cent with immediate effect. While the RBI injects liquidity through repo rate, it absorbs funds through reverse repo window.
As regards the impact of monetary action on interest rates, Indian Overseas Bank (IOB) Chairman and Managing Director M Narendra said the RBI measures may not lead to immediate hike in interest rates.
"I think rates would remain stable during this month. Beyond March it would depend on various factors like money market, call money rate etc," he said.
The initiatives, RBI said, are expected to rein in demand-side inflationary pressures and contain the spillover of food and commodity price rise to other sectors.
It further said that the RBI would "persist with the current anti-inflationary stance". The overall inflation was at 8.31 per cent in Feb this year compared to 8.23 per cent a month ago.