Mumbai: In a bid to tame inflation, the Reserve Bank of India (RBI) on Tuesday raised its short term lending (repo) rate by 50 basis points to 7.25 percent, while lowering the economic growth projection to eight percent for the present fiscal.

The Apex bank also increased the saving bank rate by 50 basis points to 4 percent to give higher returns to depositors in the wake of high inflation.

RBI Governor D Subbarao announced these measures as part of annual credit policy to control inflation, which is hovering around 9 percent, and sustain economic growth in the medium-term.

The bank has pegged GDP growth rate for the current fiscal at 8 percent against the government's projection of 9 percent. The economy grew by 8.6 percent in 2010-11.

Factoring in the many headwinds such as the very uncomfortable inflation, which stood at 8.98 in March and the rising crude and commodity prices, the Governor pegged down GDP growth by over one percent between 7.4 and 8.5 percent for the current fiscal.

"High oil and other commodity prices and the impact of the Reserve Bank's anti-inflationary monetary stance will moderate growth," Subbarao said.

"Based on the assumption of a normal monsoon, and crude oil prices averaging USD 110 a barrel over the full year 2011-12, our baseline projection of real GDP growth for 2011-12, for policy purposes is around 8 per cent," he added.

Making an ambitious inflation management objective, the policy aims at bringing down inflation to 4 to 4.5 percent for the full fiscal, with a medium term objective of 3 percent.

To contain volatility in the overnight inter-bank rates, the Apex Bank has decided to open a new borrowing facility for banks under the marginal standing facility (MSF) to be effective by May 7.

The rate of interest on this facility will be 100 bps above the repo. The banks can borrow up to 1 percent of their net demand and time liabilities (NDTL) from this facility.

On the expected policy outcome, the Governor said, the policy actions are aimed at "first containing inflation by reining the demand side pressures, anchoring inflation expectations and sustaining growth in the medium term by containing inflation...going forward, the RBI will continue with its anti-inflationary measures".

The RBI will conduct the first quarter review on July 26.

(Agencies)