MUMBAI, Jan 24: The Reserve Bank of India on Tuesday raised a key short-term interest rate by 25 basis points to 5.50 per cent, the third hike this fiscal year aimed to check inflation amid higher than expected economic growth.

The central bank raised its forecast for economic growth for the second quarter-in-a-row to 7.5 to 8.0 per cent in the fiscal year ending March 31 in its latest review of the economy.

This is based on our current assessment of agricultural output and momentum in industrial and services sectors, central bank Governor Y.V. Reddy told reporters after the release of the latest forecast.

In the second quarter, the central bank raised the growth forecast to 7.0 to 7.5 per cent from 7.0 per cent at the start of the fiscal year in April.

The higher growth forecast, combined with fears of higher inflation from rising oil prices, led the central bank to raise interest rates.

In its latest review of economic trends following the end of the third quarter on December 31, the central bank said it raised its reverse repurchase rate because of concern about higher crude prices in the year ahead ... and an upside risk to inflation.

This is a pre-emptive and forward-looking measure implemented, central bank Deputy Governor Rakesh Mohan told a press conference. The leads and lags in the monetary policy had to be addressed, he said.

In its policy review, the central bank had stressed that India, which imports 70 per cent of its energy needs, was particularly vulnerable to rising global oil prices.

The central bank also raised its repurchase rate at which it lends short-term funds to commercial banks by 25 basis points to 6.50 per cent.

The central bank however kept its long-term bank rate, at which it lends to commercial banks, at a three-decade low of six per cent.

The rate hike will draw cash from the banking system normally loaned to consumers and businesses and could lead to higher costs for mortgage holders with variable interest rates, Ganguly said.

Government bond prices fell on the rate hike with the benchmark 8.07 Per cent 2017 government security down to 105.82 rupees from 106.48 Monday.—AFP