India's central bank raised interest rates for the second time in a month on Tuesday morning and raised the amount lenders need to set aside as reserves, in an attempt to slow spiraling inflation, now running at a 13-year high. The repurchase rate was lifted to 8.5 percent from 8 percent, and the cash reserve ratio to 8.75 percent from 8.25 percent. The increase was the biggest since 2000 and followed a quarter-point rise on June 11.



Before this move, Reddy had raised the repurchase rate eight times in the past two and a half years and increased the cash reserve ratio seven times since December 2006, in an ongoing attempt to slow money supply growth and cool inflation.

India's central bank also signaled it will keep raising borrowing costs if needed. The central bank said in a faxed statement that a "heightened vigil'' was now needed to anchor inflation expectations, which is really another way of saying that the RBI has been "wrong footed" by the sudden acceleration in inflation and underscores the fact that they now recognise that they blew their opportunity to raise rates more forcefully earlier in the day.

The rupee rose slightly from near a 14-month low after the announcement, rising 0.1 percent to 42.92 per dollar as of 9:41 a.m. in Mumbai.

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