Higher fuel prices have pushed up inflation in India
India's central bank has announced an unexpected rise of half a percentage point in its prime lending rate in an attempt to control inflation.
The Reserve Bank of India's increase in its benchmark interest rate to 8.5% is the second in less than two weeks.
Indian inflation reached more than 11% earlier this month, the highest level in 13 years.
The government has been under pressure to control escalating prices of essential commodities.
The Indian Reserve Bank said its priority was to "eschew any further intensification in inflationary pressures".
It hopes that higher interest rates will reduce demand for goods.
The bank said the recent increase in the rate of inflation was largely due to higher international crude oil and metal prices feeding through to domestic prices.
Twelve months ago India's wholesale price index measure of inflation was 4.28%. It rose to 7.75% in March this year, before hitting 11.05% earlier this month.
There are concerns that the rate of inflation will derail India's fast-growing economy which is expanding at a record 8.8%.
"Growth could come down to as low as 6.5% by 2010," said Rajiv Kumar, director of the Indian Council for Research on International Economic Relations.
The benchmark rate, which was increased on Tuesday, is used as a reference by commercial banks to set their own lending rates.
The commercial banks are expected to increase rates for home and other loans following the central bank's decision.