March 30 (Bloomberg) -- India's central bank unexpectedly raised a key interest rate and increased the amount of money banks need to set aside as reserves for the second time this year to slow loan growth and curb inflation.

The Reserve Bank of India increased the repurchase rate at which it lends overnight by a quarter point to 7.75 percent from 7.5 percent, the Mumbai-based central bank said in a statement, a month before the next monetary policy announcement. It also increased the cash reserve ratio to 6.5 percent in two stages starting April 14.

The inflation rate announced today stood at a percentage point more than the highest end of the central bank's forecast of 5 percent and 5.5 percent by the end of the fiscal year on March 31. Economists including Rajeev Malik expected the central bank to hold rates at current levels to prevent derailing economic growth.

``The central bank is overdoing it to curb inflation,'' said Malik, senior economist at JPMorgan Chase & Co. in Singapore. ``After the aggressive policy tightening so far, one would have thought the central bank would wait for some time to see their impact on inflation. This move will hit growth.''

Surprised Thrice

With today's move, Reserve Bank Governor Yaga Venugopal Reddy has surprised analysts three times since December with unscheduled monetary policy announcements.

Reddy has now raised the key overnight lending rate six times since January 2006, and increased the cash reserve ratio three times since December to slow loans that have grown at an average 30 percent in the past three years, the fastest pace since the central bank started collating data in 1971.

In the past two weeks, borrowing costs in the overnight money market rose to the highest in at least a decade after companies paid their quarterly tax, forcing banks to sell dollars to replenish their cash holding. This sent the rupee to the highest in almost eight years on March 28.

The yield on the benchmark 10-year government bonds climbed 39 basis points to 8 percent this quarter as the central bank raised the cost of money and sold bonds to mop liquidity in its battle against inflation.

The benchmark wholesale price inflation has held at near a two-year high of 6.46 percent for three weeks ending March 17, the government said in a statement today. The inflation index of manufactured products is at its highest since Dec. 2004, according to government data.

``With today's action, the RBI has clearly left no room for anyone to think that they're done with monetary tightening,'' said Mahendra Jajoo, who manages the equivalent of $1.2 billion of Indian debt at ABN Amro Asset Management Ltd. in Mumbai. ``This is going to have a strong psychological and physical impact on the bond market. The 10-year bond yield may rise by as much as 25 basis points after this.''

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net.

Last Updated: March 30, 2007 09:25 EDT