India’s central bank raised benchmark interest rates by a more-than-estimated 0.5 percentage point after forecasting inflation will stay at an “elevated level” until at least September.

The Reserve Bank of India lifted the repurchase rate to 7.25 percent from 6.75 percent, according to a statement in Mumbai today. Only seven of 25 economists in a Bloomberg News survey had predicted the move, while the rest expected a quarter-point increase. The central bank boosted the reverse repurchase rate to 6.25 percent from 5.75 percent.

Inflation in India is the highest after Russia among the so-called BRICS economies and if left unchecked could rekindle public protests and undermine Prime Minister Manmohan Singh’s government. Rising borrowing costs will slow India’s economic growth this year and help ease inflation to 6 percent “with an upward bias” by March 31, 2012, Governor Duvvuri Subbarao said.

“We aren’t going to see any reprieve from inflation in the coming quarters,” said Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc. “Elevated levels of inflation mean the rate-hike cycle will be prolonged further.”

The yield on the 7.80 percent bond due in April 2021 rose to 8.21 basis points from 8.16 percent before the rate decision was announced, while the rupee advanced to 44.32 rupees per dollar. The Bombay Stock Exchange Sensitive Index, or Sensex, lost 0.8 percent as of 11:35 a.m.

India’s economy may expand “around 8 percent” in the year through March from 8.6 percent in the previous 12 months, the central bank estimated.

Inflation Pressure

Subbarao is tightening monetary policy further after a 2 percentage-point increase in the repurchase rate since mid-March 2010 failed to damp India’s benchmark wholesale-price inflation, which accelerated to 8.98 percent in March and exceeded the central bank’s 8 percent estimate.

By comparison, consumer prices rose 5.4 percent in China, 9.5 percent in Russia, 6.3 percent in Brazil and 4.1 percent in South Africa.

“The inflation rate will remain close to the March 2011 level over the first half of 2011-12, before declining,” Subbarao said in today’s statement. “These projections factor in an upward revision of petrol and diesel prices.”

The end of provincial elections gives the government room to ease fuel-price controls on state refiners such as Indian Oil Corp., the nation’s biggest refiner.

Goldman Sachs Group Inc. said in a report April 27 that the government may start allowing Indian Oil and others to charge more for the fuels once elections in four states and one union territory conclude on May 10.

Fuel Prices

Prime Minister Singh has sought to appease voters with price caps on diesel, kerosene and cooking gas after inflation triggered nationwide protests earlier this year.

Inflation erodes spending power in India, where the per capita income is about $1,230, versus $40,580 in the U.S.

Indian Oil hasn’t increased diesel prices since June 26 and gasoline since Jan. 16, according to the company’s website.

Oil has climbed 31 percent in London and 23 percent in New York this year as revolts that overthrew governments in Tunisia and Egypt raised concern that supplies from the Middle East would be disrupted as protests spread.

“While the persistence of inflation over the next few months has been incorporated in this policy, the Reserve Bank will continue to persevere with its anti-inflationary stance,” Subbarao said.

Policy Rate

The central bank said that the repurchase rate will be its policy rate to signal accurately its monetary policy stance. The reverse repurchase rate will continue to be operative and will be pegged at 100 basis points below the repurchase rate, the statement showed.

The slowdown in growth “should contribute to some easing of demand-side inflationary pressures, particularly in the second-half, as the full impact of monetary tightening is realized,” the governor said.

Recent economic indicators such as the purchasing managers’ index and credit expansion signal consumer demand is holding up for now, stoking price pressures.

Manufactured-products inflation accelerated to 6.21 percent in March, an 11-month high, according to data compiled by Bloomberg.

Consumer Demand

“Elevated prices have left the RBI with no option but to prioritize inflation control over potential growth concerns,” Siddhartha Sanyal, a Mumbai-based economist at Barclays Bank Plc, said before the decision. “There is no respite on the inflation front as second-round effects from rising input costs are starting to kick in.”

Factory output grew at the fastest pace in five months, with the purchasing managers’ index climbing to 58 in April from 57.9 in March, HSBC Holdings Plc and Markit Economics said yesterday. A number above 50 indicates expansion.

Commercial loans rose 22 percent from the previous year as of April 8, more than the 20 percent rate prescribed by the Reserve Bank.

“The domestic demand and supply dynamics are indeed driving inflation higher,” Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore, said before the decision. “The central bank will need to tighten rates.”

Inflation pressures are also building up as companies including Maruti Suzuki India Ltd. and Tata Steel Ltd. increase prices to counter higher costs of raw materials.

“The persistent rise in input costs is a cause for worry and has forced us to pass on the increase in prices to consumers,” B. Muthuraman, vice chairman of Tata Steel, the nation’s biggest producer of the alloy, said in an April 25 interview. “The pressure to raise wages has also increased over the past year,” he said, without elaborating.

Maruti, India’s largest carmaker, boosted prices of its vehicles by as much as 9,000 rupees ($203) last month, the automaker’s sales chief, Mayank Pareek, said April 5.

“The extent to which the increase in input prices translates into output prices will have an influence on the inflation path,” the central bank said.

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