The Reserve Bank of India (RBI) on Tuesday hiked the short-term lending (repo) rate by 0.25 percent to 7.75 percent.
This move of the central bank will make corporate and consumer loans more expensive.
RBI Governor Raghuram Rajan brought down the cost of short-term funds for banks by slashing the marginal standing facility (MSF) rate by a similar quantum to 8.75 percent.
Rajan said the policy stance and measures are intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth.
"These will help strengthen the environment for growth by fostering macroeconomic and financial stability. The Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics," he said.
The RBI reduced the growth forecast for the current fiscal to 5 percent from 5.5 percent projected earlier.
The central bank left other rates unchanged, such as the Cash Reserve Ratio (CRR) at 4 percent, and Mandatory holdings in government securities and other liquid assets as a solvency measure (SLR) at 23 percent.