India's central banking institution increased key interest rates by 25 basis points with immediate effect in order to curb increasing inflation, which could make housing and auto loans pricier.

The Reserve Bank of India (RBI) increased the repo rate by 25 basis points to 5.5% and the reverse repo rate by a similar quantum to 4%, as part of its "calibrated exit from the expansionary monetary policy", which was part of the stimulus package by the government at the height of the global financial crisis.

The repo rate, which was 5.25% before Friday's revision, is the interest charged by RBI on borrowings by commercial banking institutions. An increase in this rate augments the cost of borrowing for commercial banks.

The reverse repo, which stood at 3.75%, is the rate at which RBI borrows money from commercial banks. An increase in this rate makes it more lucrative for banks to park their funds with the central bank.

While explaining its decision, which came after the stock markets closed, the central bank stated that a combination of factors, comprising rising inflationary numbers, which had spread from food prices to other items, prospects of a normal monsoon, sustaining economic recovery and upbeat industrial production numbers prompted it to raise the rates.

Banks have been under pressure owing to a huge payout by telecom operators to the administration because of 3G and broadband wireless access (BWA) license charges.

The central bank had introduced steps to relieve liquidity in May to offset the impact of this payout and said that it was continuing these measures, as it did not want to hamper borrowing activities.

The rate hikes come after the government's decision Monday to free fuel prices, which according to Kaushik Basu, chief economic advisor to the finance ministry, could cause a short-term spike in inflation. (With Inputs from Agencies)