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Last Updated: Tuesday, 24 January 2006, 16:11 GMT
Inflation fears hit Indian rates
Cars in India
India's economic growth has been 6-8%, boosting demand for cars
India's central bank, the Reserve Bank of India, has raised short-term interest rates to 6.5% to keep a check on inflation.

However, the bank kept its benchmark bank rate at 6%, where it has been since April 2003.

At the same time, increased farm output led the bank to increase its forecast for economic growth in the financial year to 31 March to 7.5-8.0%.

The forecast has risen twice since the 7% growth prediction made last April.

Good monsoon rains helped boost India's farm output in recent months, but the bank said rising oil prices, increased corporate borrowing and rising domestic demand threatened to push inflation upwards.

"Corrosive effects"

For this reason, it raised the repurchase rate - at which it lends short-term funds to commercial banks - by 25 basis points to 6.50%.

Indian women labourers walk back home after a day of work in a paddy field near Velankanni in the Nagapattinam district of India"s southern state of Tamil Nadu
Agriculture is a crucial part of the Indian economy

It also raised the reverse repurchase rate by 25 basis points to 5.50% - making it more attractive for lenders to place funds with the central bank, rather than lending it to companies.

"A measured policy response at this juncture would stabilise inflation expectations and prevent corrosive effects on growth," it said in its quarterly review.

Analysts expect both the short-term rates to rise again in the next few months, as the central bank seeks to dampen inflationary pressures without raising the benchmark rate, which banks use to set the cost of borrowing.

The Reserve Bank of India last raised short-term rates in October, citing similar concerns.

Borrowers and market watchers are hoping that the benchmark rate remains steady, helping to ensure continued strong growth in the Indian economy.

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