India's central bank Friday raised its key interest rate by a quarter percentage point to battle persistent inflation. The move followed a hike in gasoline prices by state-owned oil companies.
The Reserve Bank of India raised its short-term lending rate _ or repo rate _ to 8.25 percent from 8 percent.
The RBI has raised interest rates a dozen times over the last eighteen months to tame inflation, particularly for food. Officials say slower growth will be the cost of controlling inflation.
India's inflation was nearly 9.5 percent for the week ended Sept. 3.
Overnight Friday, government oil companies raised gasoline prices by up to 3.32 rupees ($0.07) a liter after a dip in the rupee's exchange rate increased the cost of buying crude.
India's economy also slowed in the April-June quarter. According to the most recent government data Asia's third-biggest economy expanded 7.7 percent from a year earlier. It grew 8.8 percent in the April-June quarter of 2010.
The economy grew 8.5 percent in the last fiscal year that ended March 31.
In a statement Friday, the central bank said that since its last review in late July, the "the global macroeconomic outlook has worsened."
"There is growing consensus that sluggishness will persist longer than earlier expected," the statement said.
The bank said that inflationary pressures were expected to ease as the end of the current fiscal year approaches due to stabilizing energy prices and moderating domestic demand.
The hike in gasoline prices was "necessary" because of losses incurred by oil companies due to heavy government subsidies for diesel and kerosene oil, said Chandrajit Banerjee of the Confederation of Indian Industry.
"Although this may add a bit to inflation, the alternate scenario of not hiking would mean a further increase in the fuel subsidy borne by the government resulting in additional borrowing by the government," Banerjee said in a statement.