With a view to rein in high inflation, the Reserve Bank of India today raised its key short-term lending and borrowing rates by 0.25 per cent each with immediate effect.

The short-term lending (repo) rate has been hiked to 6.50 per cent and the borrowing (reverse repo) to 5.50 per cent, a move that will make funds expensive for banks and may lead to a hike in interest rates.

The Reserve Bank, however, projected GDP growth at 8.5 per cent with an upside bias. It also warned that inflation is a matter of concern and revised its projection for FY'11 to 7 per cent from 5.5 per cent earlier.

These initiatives, the RBI said will "rein in rising inflationary expectations, which may be aggravated by the structural and transitory nature of food price increases."

The apex bank further said its monetary action was aimed at reining in rising inflationary expectations, while at the same time being moderate enough not to disrupt growth.

It also aims to contain the spill-over from rising food and fuel prices to generalised inflation and continue to provide comfort to banks' liquidity management operations, the RBI said.