The RBI today hiked short-term lending and borrowing rates and the portion of money banks deposit with it by 25 basis points each, in a move aimed at controlling the inflation spiral without choking growth.

The apex bank hiked its repo, reverse repo (overnight lending and borrowing rates) to 5.25 per cent and 3.75 per cent, respectively, while the Cash Reserve Ratio, or the portion of deposits banks park with RBI, to 6 per cent in line with analysts' expectations.

The hike in CRR, which will come into effect from April 24, will absorb Rs 12,500-crore excess cash from the banking system. Banks have already indicated that they may not pass on the increased cost to the borrowers immediately as liquidity still remains sufficient in the system.

RBI began exiting its accommodative policy stance in January by hiking CRR to 5.75 per cent and the short term rates by 0.25 per cent each in March.

"There wouldn't be any short term impact on interest rates. This has been already discounted by the market," IDBI Bank executive director Sushil Muhnot told PTI.

Assuring that the policy actions would not halt the recovery, the RBI pegged the FY'11 GDP growth at 8 per cent.

It also pegged the wholesale inflation, which is currently hovering close to the double-digits, at 5.5 per cent for FY' 11.

Warning that demand side pressures have clearly emerged in the economy, the central bank said its medium term objective is to contain the inflation at 3 per cent and reiterated that the policy will be tuned in a calibrated manner to support the recovery process.

"There is clear evidence of demand side pressures building up...with the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalizing our policy instruments," the RBI said.

Announcing the policy measure, the central bank said it would closely monitor the price situation in the economy and would take further action as warranted.

The central bank, which has visibly shifted its policy priority to inflation from growth, also warned that with growth expected to accelerate next year, capacity constraints are likely to put additional pressure on prices and "there was a need that demand side inflation does not become entrenched."

On the other side, the huge Rs 4.57 lakh crore government borrowing is likely to pose a bigger challenge to the central bank to manage in the current fiscal as compared to the last year and expressed concerns that this may crowd out the private demand.

HIGHLIGHTS

Following are the highlights of the RBI's Monetary Policy for 2010-11.

* Cash reserve ratio raised by 25 basis points to 6 pc

* Repo rate raised by 25 basis points to 5.25 per cent

* Reverse repo rate hiked by 25 basis points to 3.75 per cent

* CRR hike to come into effect from April 24

* CRR hike to suck out Rs 12,500-crore liquidity

* Bank rate retained at 6 per cent

* Economic growth projection seen at 8 pc for 2010-11

* FY'10 GDP growth seen at 7.2-7.5 per cent

* Inflation pegged at 5.

Another report:

RBI pegs FY11 GDP growth at 8 pc

The Reserve Bank was today optimistic about the economy expanding by 8 percent this fiscal, despite tightening of the monetary policy.

"The Indian economy is firmly on the recovery path... the baseline projection of real GDP growth for 2010-11 is placed at 8 per cent with an upside bias," the apex bank said in its monetary policy statement for FY 11 today.

GDP growth for FY 10 was seen at 7.2-7.5 percent.

The RBI's optimism about an eight per cent growth in FY' 11 is based on the fact that India's exports have been growing and industrial sector recovery has become more broad-based.

"Exports have been expanding since October 2009, a trend that is expected to continue," it said.

Similarly, industrial sector recovery is increasingly becoming broad-based "and is expected to take a firmer hold going forward on the back of rising domestic and external demand," the apex bank said.

The corporate sector has also recorded an improved profitability which is reflective of the improved performance of the industrial sector, it said. .

"Service sector activities have shown buoyancy, especially during the latter half of 2009-10 and leading indicators of various sectors such as tourist arrivals, commercial vehicles production and traffic at major ports show a significant improvement," the Reserve Bank said.

Besides, a sustained increase in bank credit and in the financial resources raised by the commercial sector from non-bank sources also suggest that the economic recovery is gaining momentum, the RBI said.

On downside risks, the apex bank said that uncertainty still persisted about the pace and shape of global recovery and that private demand in major advanced economies continued to be weak.

"There is a risk that once the impact of public spending wanes, the recovery process will be stalled," it said, adding "the prospects of sustaining the recovery hinge strongly on the revival of private consumption and investment."

While domestic demand would drive the Indian recovery, significant trade, financial and sentiment linkages "indicate that a sluggish and uncertain global environment can adversely impact the Indian economy," the RBI said.

Secondly, there is a likelihood of commodity and energy prices hardening further which could add to inflationary pressure, it warned.