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MUMBAI (Reuters) - India's central bank raised interest rates on Tuesday for the 13th time since early 2010 to battle stubbornly high inflation but signaled it may end the tightening cycle that has put it at odds with peers more concerned about weak global growth.
The Reserve Bank of India (RBI) raised its policy lending rate, the repo rate, by 25 basis points to 8.5 percent. The rise was in line with expectations and marked the central bank's latest effort to tame inflation that has topped 9 percent for nearly a year.
The likelihood of a rate move at the next scheduled review in December is "relatively low," the central bank said in a statement. "Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted."
Interest rate markets fell and stocks were briefly lifted by hopes that a flurry of rate rises widely seen as weighing down the emerging giant's growth could be coming to an end.
The central bank acknowledged in its quarterly report on economic and monetary developments issued on Monday that growth risks had increased, a factor that has already prompted Brazil, Indonesia and Singapore to relax monetary policy.
In a statement on Tuesday, the RBI revised down its economic growth forecast for the current fiscal year ending in March to 7.6 percent from 8 percent with a downward bias.
The RBI stuck with its forecast that headline wholesale inflation will ease to 7 percent at the end of the fiscal year. But it has repeatedly missed its inflation forecasts as supply-side constraints, global commodity prices and loose fiscal policy limited the effectiveness of monetary tools.
Investors took comfort in the prospect that India's tightening cycle may be coming to an end, but warned that it wouldn't necessarily translate into fresh impetus for an economy running at its weakest growth rate since 2009.
"This might be the last rate hike," said B. Hariharan, group finance director at conglomerate Ballarpur Industries BILT.BO. "But corporates are unlikely to take any new investment decisions at these levels. They would rather wait for the rates to soften."
India's 1-year swap rate fell 2 basis points and 5-year swaps dropped 7 basis points.
The main BSE index .BSESN extended gains after the policy decision, rising by as much as 1.1 percent, before turning negative as banking stocks fell in reaction to the central bank's move to deregulate savings rates.
RBI Governor Duvvuri Subbarao also said the central bank would not lose its focus on inflation.
"While the impact of past monetary actions is still unfolding, it is necessary to persist with the anti-inflationary stance," he said in the policy statement.
The central bank said medium-term inflationary risks remained high due to structural imbalances in agriculture, infrastructure bottlenecks, and India's fiscal deficit.
"In the absence of progress on these, over the medium term, the monetary policy stance will have to take into account the risks of inflation surging in response to even a moderate growth recovery," it said.
Wholesale inflation was 9.72 percent in September, its 10th straight month above 9 percent and the highest among the BRIC grouping of economies that includes Brazil, Russia and China.
India's inflation is largely driven by high food and global commodity prices, plus fiscal policies that spur demand. These are factors beyond the scope of monetary policy that have prompted some critics to call for a halt in the relentless rise in interest rates.
India's economy grew 7.7 percent in the year through the June quarter, its weakest in six quarters, while industrial output growth was below 5 percent in July and August.
In Reuters poll last week, 17 economists had expected the central bank to raise rates and 13 had expected a pause. Most respondents said they expected rates to be left unchanged after Tuesday for the remainder of the fiscal year through March.