The Reserve Bank of India on Tuesday raised key interest rates by 25 basis points, as expected, tightening policy for the second month in arow as inflation heads towards double digits.

The Reserve Bank of India also raised its cash reserve ratio (CRR) requirement for banks by 25 basis points, as expected, in a move to drain further liquidity from the financial system. The hike in CRR will suck out Rs 12,500 crore from the banking system. The CRR increase will come into effect from April 24.

India last month became the second Group of 20 economy after Australia, to raise policy interest rates as the world economy recovers from it worst downturn in decades. The central bank surprised markets by raising rates by 25 basis points ahead of this month's scheduled quarterly policy review.

Asia's third-largest economy is set to grow at 8.5 percent in the current financial year and 9 percent the following year, and inflation is spreading beyond food to fuel and manufactured goods such as cars. March annual inflation reached 9.9 percent, its highest in 17 months.

The central bank lifted the reverse repo rate, at which it absorbs excess cash from the banking system, by 25 basis points to 3.75 percent. It increased the repo rate, at which it lends to banks, by 25 basis points to 5.25 percent.

It raised the reserve requirement for banks by 25 basis points to 6.00 percent.

"With the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalising our policy instruments," RBI Gov. Duvvuri Subbarao said in the policy statement.

Malaysia and China are among the developing nations that have begun to use monetary tools to cool their economies. India also raised policy rates unexpectedly on March 19 by 25 basis points as food price increases spilled over to manufacturing that could set off an inflationary spiral.

Industrial output has risen more than 15% for three straight months, wholesale price inflation is at 9.9%, much above the central banks raised target of 8.5%, and loan demand is rising, indicating acceleration in economic growth. That has prompted many to forecast a 9% economic expansion this fiscal.