The Reserve Bank of India (RBI) raised its repo rate, at which it lends to commercial banks, by a quarter percentage point to 8.
25 percent and increased the reverse repo -- the rate it pays to banks for deposits -- to 7.25 percent.
RBI governor Duvvuri Subbarao said the move was necessary because inflation remained high and well above the bank's "comfort zone" of around five percent.
India's benchmark wholesale price index -- the closest watched cost-of-living monitor -- hit a 13-month-peak of 9.
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78 percent in August.
Overall, India's inflation is the highest of any large global economy.
The monetary tightening lifted the repo rate to a near three-year peak and the reverse repo to its highest in over a decade.
Subbarao said it was "imperative to persist with the current anti-inflationary stance", adding future rate decisions will be based on "signs of downward movement in the inflation trajectory".
"A premature change in the policy stance could harden inflationary