With the rate of price rise not showing signs of moderation, the Reserve Bank today raised its March end inflation projection to 7 per cent, from 6 per cent estimated earlier.

"Keeping in view the domestic demand-supply balance, global trends in commodity prices and the likely demand scenario, we have revised the baseline projection for WPI inflation for March 2012 upward to 7 per cent," the RBI said in its first quarterly policy review.

Inflation for June stood at 9.44 per cent on the back of high prices of manufactured products and food items, especially protein based products.

The central bank said that going forward inflation is expected to remain at elevated levels, and would only show signs of moderation towards the later part of the fiscal.

The RBI said its future policy action would depend on inflation scenario and hinted that it could go for further rate hikes. The next mid-quarterly policy review is on September 16.

"As regards guidance for the future, going forward, the monetary policy stance will depend on the evolving inflation trajectory, which in turn, will be determined by trends in domestic growth and global commodity prices. A change in stance will be motivated by signs of a sustainable downturn in inflation," RBI governor D Subbarao said.

The overall wholesale prices based inflation has remained stubbornly close to double digits and inflationary pressure remained broad-based in the first quarter of the current fiscal.

The food inflation, he said, would depend upon the progress of monsoon, minimum support prices and supply of protein-based items. The food inflation for the week ended July 9 was 7.58 per cent.

"Both the level and persistence of WPI inflation are a cause for concern," Subbarao said.

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RBI ups interest rates by 50 bps

The RBI on Tuesday hiked short-term lending and borrowing rates sharply by 50 basis points for the third time in three months to tame high inflation, a move that would make all personal and corporate loans more expensive.

The RBI has also revised its fiscal-end inflation projection to 7 per cent from 6 per cent earlier.

With today's increase of 0.50 per cent, the short-term lending (repo) rate has been hiked to 8 per cent and the short-term borrowing (reverse repo) rate has also been increased by a similar margin to 7 per cent.

It, however, has retained the cash reserve ratio (CRR) at 6 per cent.

"Notwithstanding signs of moderation, inflationary pressures are clearly very strong... inflation continues to be the dominant macroeconomic concern. On the basis of this assessment, it has been decided to increase policy repo rate by 50 basis points from 7.5 to 8 per cent with immediate effect," RBI governor D Subbarao said while announcing the quarterly review of the monetary policy.

This is the 11th time since March, 2010, that the RBI has raised the interest rate to check inflation, which is currently ruling at over 9 per cent.

The RBI's unexpected decision led to a sharp decline of over 300 points in the BSE Sensex. The 30-share Sensex fell to 18,570 after announcement of the policy, although it had opened in positive terrain.

The RBI admitted that its cumulative decision of past actions to curb demand and anchor medium term inflationary expectations will curtail growth in the near term.

Bankers are of view that the increase in key policy rates by the RBI will definitely have an impact on interest rates, leading to loans becoming expensive.

"The hike is more than expected and it will push interest rate by up to 50 basis points," said Oriental Bank of Commerce executive director S C Sinha.

In the annual policy on May 3, the apex bank had increased policy rates by 50 bps, which was followed by a 25 bps hike at its mid-quarter review in June.

While revising the inflation target upward, Subbarao reiterated the RBI's view that the policy is guided by uncomfortable inflation, which hovers well above 9.4 per cent.

Sounding hawkish, the governor said, "Going forward, the monetary policy stance will depend on the evolving inflation trajectory, which in turn will be determined by trends in the domestic growth and global commodity prices.

"A change in stance will be motivated by signs of a sustainable downturn in inflation," Subbarao said.

Accordingly, the RBI, which has been at the receiving end for its repeatedly off-mark inflation projections, also revised its fiscal-end inflation forecast upward by 1 per cent to 7 per cent from its 6 per cent estimate made earlier in May.

Admitting that there has been a moderation in growth, the governor maintained his previous estimate of 8 per cent GDP growth for the current fiscal and pointed out downside risks to growth as global commodity prices, the uncertain global macro economic environment and the centre's inability to meet the fiscal deficit target of 4.6 per cent on the back of a rising fuel subsidy bill.

"Overall, the current balance of global and domestic factors suggest that monetary policy needs to persist with a firm anti-inflationary stance," the governor concluded.

RBI rates hike will help contain inflation

Welcoming the Reserve Bank's decision to hike key rates by a hefty 50 basis points, finance minister Pranab Mukherjee today said it will help bring down inflation to a comfortable level of 6-7 per cent by year-end.

"The Reserve Bank of India has sought to give a strong signal to further moderate inflation and check inflationary expectations," Mukherjee said.

Inflation has remained stubbornly close to double-digit levels during the first quarter of the current fiscal.

Mukherjee said the RBI rate hike was necessary to bring down inflation to an acceptable level at the earliest.

Overall wholesale price-based inflation stood at 9.44 per cent in June. To tame the inflation monster, the RBI today hiked key policy rates by 50 basis points.

"With this policy adjustment, we will be able to get back to a more comfortable inflation situation that takes us to the year-end inflation level of 6 to 7 per cent," Mukherjee added.

The RBI has hiked its policy rates 11 times since March, 2010, to curb inflation. However, the problem persists.

Mukherjee said although food inflation has moderated in recent months, pressure in manufactured items has hardened.

While coming out with its first quarterly policy review for the 2011-12 financial year, the RBI admitted that there has been a moderation in growth, but maintained its previous estimate of 8 per cent GDP growth for the current fiscal.

Mukherjee said, "The overall GDP growth for 2011-12 so far is in line with the momentum attained in 2010-11."

There have been concerns that the country's economic growth could see some moderation on the back of a deceleration in factory output growth in April-May.

Industrial output growth in April-May this year averaged 5.7 per cent, compared to 10.8 per cent in the same period last year.