Targeting to check the double digit inflation, RBI today hiked its short-term lending and

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borrowing rates by 0.25 per cent and 0.50 per cent respectively, a move that could put pressure on banks to make auto, home and commercial loans expensive.

Although Finance Minister Pranab Mukherjee said the steps announced by the Reserve Bank will check inflation without hurting growth, bankers and the industry fear that the initiatives will put pressure on interest rates.

In its first quarterly review of the monetary policy, RBI today increased the short-term lending rate (repo) to 5.75 per cent and short-term borrowing rate (reverse repo) to 4.50 per cent with immediate effect.

It, however, kept the cash reserve ratio (CRR), the cash which banks are required to keep with RBI, and bank rate unchanged as liquidity is tight in the system following over Rs one lakh crore outgo due to payments by telecom companies for acquiring spectrum.

The central bank has also raised the inflation target from 5.5 per cent to six per cent and said that economy will grow by 8.5 per cent, up from earlier projection of 8 per cent, this fiscal.

"I expect this policy will lead to further easing of inflation which already is going down. It should also keep us fully on track in terms of growth. The monetary policy ...is another calibrated step in the right direction," Mukherjee said while talking to reporters in Delhi.

However, according to Central Bank of India executive director Arun Kaul, "the monetary action by RBI is aimed at attacking inflation. It has made funds costlier for banks. It is a signal for upward movement of interest rates".

Describing the RBI's policy measures "a bit worrisome", Ficci president Rajan Mittal said, "the reverse repo (rate) increase will incentivise parking of funds by banks with RBI...reducing lending opportunities to industry...there is always underlying fear of the rate hike eventually leading to increase in lending rate."

Assocham President Swati Piramal expressed fear that "the lending rates may move north by 25 to 50 basis points making bank borrowings a little dearer..."