India hiked key interest rates by a quarter point yesterday – its eighth hike in a year – warning that rising oil prices would aggravate already high inflation.

The Reserve Bank of India (RBI) also raised its inflation forecast for the year from 7 percent to 8 percent on high crude prices and rising manufacturing costs, saying that its current anti-inflationary stance was likely to continue despite instability in the Middle East and natural disasters in Japan.

“The underlying inflationary pressures have accentuated, even as risks to growth are emerging,” the bank said.

As expected, the central bank raised the repo rate – its short-term lending rate – from 6.5 percent to 6.75 percent with immediate effect. It raised the reverse repo rate – its short-term borrowing rate – from 5.5 percent to 5.75 percent.

The move disappointed business leaders, who say the rising cost of finance and materials is already weakening confidence and crimping growth.

“RBI’s action in raising policy rates though expected will adversely affect growth prospects,” said Rajiv Kumar, the director-general of the Federation of Indian Chambers of Commerce and Industry.

Central banks across Asia have raised rates in their fight against inflation, with India more aggressive than most.

While India’s central bank continues to prioritise its anti-inflation battle, it is clearly grappling with new fears that sweeping political change in the Middle East and last week’s catastrophic earthquake and tsunami in Japan will hamper global growth.

Despite a largely domestic driven economy, India’s reliance on oil imports and the impact of short-term foreign fund flows on capital markets and currency make it vulnerable to global events.

India imports about three-quarters of its oil and the government pays hefty subsidies on fuel and fertiliser. That means rising crude prices threaten not just inflation, but also the sizable current account and fiscal deficits.

The central bank said it was too early to assess the impact of the natural disaster in Japan on India’s economy, but warned that a turn from nuclear energy could exert further upward pressure on petroleum prices.

The bank urged policymakers to contain spending on subsidies, increase agricultural productivity to ease supply constraints that have caused prolonged double-digit food inflation, and work to attract long-term capital inflows from foreign direct investment.

It added that India was on track to clock 8.6 percent growth this year but cautioned that uncertain commodity prices could dampen the investment climate. Rising prices, along with a crush of corruption scandals, have battered India’s ruling Congress Party coalition, spurring street protests in some places.

India’s latest inflation data – 8.3 percent for February – took many by surprise. HDFC Bank’s Abheek Barua said: “The economy seems to be showing signs of overheating

.” – Sapa-AP