Targeting to check the double digit inflation, RBI today hiked its short-term lending and borrowing rates by 0.25 per cent and 0.50 per cent respectively, a move that could put pressure on banks to make auto, home and commercial loans expensive.

Although finance minister Pranab Mukherjee said the steps announced by the Reserve Bank will check inflation without hurting growth, bankers and the industry fear that the initiatives will put pressure on interest rates.

In its first quarterly review of the monetary policy, RBI today increased the short-term lending rate (repo) to 5.75 per cent and short-term borrowing rate (reverse repo) to 4.50 per cent with immediate effect.

It, however, kept the cash reserve ratio (CRR), the cash which banks are required to keep with RBI, and bank rate unchanged as liquidity is tight in the system following over Rs one lakh crore outgo due to payments by telecom companies for acquiring spectrum.

The central bank has also raised the inflation target from 5.5 per cent to six per cent and said that economy will grow by 8.5 per cent, up from earlier projection of 8 per cent, this fiscal.

"I expect this policy will lead to further easing of inflation which already is going down. It should also keep us fully on track in terms of growth. The monetary policy ...is another calibrated step in the right direction," Mukherjee said while talking to reporters in Delhi.

However, according to Central Bank of India executive director Arun Kaul, "the monetary action by RBI is aimed at attacking inflation. It has made funds costlier for banks.

It is a signal for upward movement of interest rates".

Describing the RBI's policy measures "a bit worrisome", Ficci president Rajan Mittal said, "the reverse repo (rate) increase will incentivise parking of funds by banks with RBI...reducing lending opportunities to industry...there is always underlying fear of the rate hike eventually leading to increase in lending rate."

Assocham president Swati Piramal expressed fear that "the lending rates may move north by 25 to 50 basis points making bank borrowings a little dearer

State Bank of India Chairman O P Bhatt said the pressure on interest rates, which has been there, will go up further, following the RBI move.

"Upward bias has definitely built up and now all depend on credit offtake...every bank will absorb it for now and put it into their calculation. Different banks have different profiles, and at SBI, we will be looking and thinking (at raising rates) over today and tomorrow," Bhatt said, adding the pressure on the lending rates, he added, will have been much more had the RBI raised the CRR.

Finance Secretary Ashok Chawla, however, described the RBI move as the "right approach" saying, "the overall growth parameter will not be affected...credit growth which they have projected at 20 per cent will also continue to provide stimulus to corporates and normal industrial activities."

"Given both the trends in liquidity and prices, it was expected that RBI would tighten policy. I don't think it will have any adverse effect on the real economy," opined Planning Commission Deputy Chairman Montek Singh Ahluwalia

Justifying hiking the repo and reverse rates to 5.75 per cent and 4.5 per cent, respectively, RBI said, "inflationary pressures have exacerbated and become generalised with demand side pressures clearly visible given spread and persistence of inflation, demand-side inflationary pressures must be contained."

Earlier this month, the apex bank had hiked repo and reverse repo rates by 0.25 per cent each as inflation remained above 10 per cent for the fifth month in row. Prior to this, RBI had thrice raised its key rates, since January.

RBI's projection of a higher inflation than the earlier estimate could partly be attributed to the fuel price hike effected late June. The central bank said there can be an up to 1 percentage point impact on WPI-inflation owing to the fuel price hike.

On June 25, the Centre had raised petrol prices by Rs 3.5 a litre while decontrolling them and hiked diesel prices by Rs 2 a litre, LPG by Rs 35 a cylinder and kerosene by 3 a litre.

The central bank said the monetary policy stance would be aimed at containing inflation while it will be prepared to respond to any further build-up of inflationary pressures.

The apex bank will undertake mid-quarter policy reviews, on the lines of major central banks abroad, "to take the surprise element out of the off-cycle actions." The first such review will be on September 16.

Uncertainty over global recovery, it added, could have possible adverse consequences for the country. If the global recovery slows down, it will affect all emerging market economies, including ours, through usual exports, financing and confidence channels, the RBI said, adding a global slowdown also carries the significant risk of a potential slowdown in capital inflows, it said, adding that it may act as constraint to domestic investment.