Warning of tough times ahead, the RBI on Tuesday raised the key short term lending rate and savings bank rates by 50 basis points and advised the government to hike petroleum prices as soon as possible in line with the ruling global crude prices.

In view of uncertainty prevailing in the global market, the RBI, while announcing its annual Credit Policy, has pegged the growth outlook for 2011-12 at a lower level of 8 per cent as against the government's projection of 9 per cent.

The RBI's decision to increase its lending (repo) and borrowing (reverse repo) rates by 50 basis points to 7.25 per cent and 6.25 per cent respectively will raise the cost of home, auto and other loans.

"Current elevated rate of inflation pose significant risk to future growth. Bringing them down, therefore, even at the cost of some growth in the short run should take precedence," RBI governor D Subbarao said.

The current inflation is hovering around 9 per cent, much above the RBI's confort level of 5-6 per cent.

Commenting on the RBI policy, finance minister Pranab Mukherjee said "this (rate hike) was necessary to contain inflation. Inflationary pressures to the economy is still very high".

The RBI, however, gave much required relief to general depositors by increacing the savings bank rate to four per cent from 3.5 per cent now. This would also have a bearing on the lending rates of the banks.

Making a strong case for increasing the petroleum prices in line with the global crude prices, the RBI said that any delay would widen the fiscal deficit and counter the moderating trend in aggregate demand.

"Even though an adjustment of domestic retail prices may add to the inflation rate in the short run, RBI believes this needs to be done as soon as possible. Otherwise, the fiscal deficit will widen and will counter the moderating trend in aggregate demand," Subbarao said.

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Tough monetary policy needed to fight inflation: FM

Supporting Reserve Bank's hawkish stance on monetary policy, finance minister Pranab Mukherjee on Tuesday said the increase in the key rates was necessary to contain inflation.

"This (rate hike) was necessary to contain inflation. Inflationary pressure in the economy is still very high," Mukherjee told reporters after the RBI announced its annual monetary policy for 2011-12.

The central bank increased the repo rate (short term lending rate) by 50 basis points to 7.25 per cent to rein in inflation, which was almost 9 per cent in March. It is a signal for banks to tighten interest rates.

RBI has pegged the year-end inflation at 6 per cent but cautioned that for the first half of the fiscal 2011-12, the rate of price rise would be in the range of 9 per cent.

The finance minister said monetary policy tightening was required "to contain inflation in the context of the volatility of commodity prices, including energy prices and food prices in the international market".

On the issue of growth-inflation tradeoff, RBI governor D Subbarao said "high and persistent inflation undermines growth by creating uncertainty for investors and driving up inflation expectations".

Agreeing with Subbarao, Mukherjee said the economic growth for the current fiscal would be influenced by international commodity prices and monsoon rains.

"It would depend upon the energy prices and on the behaviour of good monsoon....we are hoping that there will be good monsoon," the finance minister said.

On the rising crude oil prices in the backdrop of political upheavals in Middle East and North Africa, the Mukherjee said "that uncertainty is still there".

RBIs' GDP projection is lower at 8 per cent for the current fiscal. The government had pegged it at 9 per cent.