Reserve Bank of India (RBI) Governor Shaktikanta Das said "to raise the policy rate by 40 basis points to 4.40% with immediate effect."
This is the first increase in borrowing rates since August 2018.
The surprise hike ends two years of record low interest rates and comes hours before the U.S. Federal Reserve is to make its biggest rate hike in two decades to respond to accelerating inflation in the world's largest economy.
Asia's third-largest economy has rebounded strongly from the pandemic with one of the fastest growth rates in the world but is now facing rising costs from soaring commodity prices.
Consumer price inflation has consistently exceeded the RBI's 2-6% target in the first three months of the year, hitting 6.95% in March, its highest level in 17 months.
Economists expect inflation to top 7% in April.
India is the world's largest importer of edible oils such as palm oil and soybean oil, which are trading at record highs.
The country of 1.4 billion people also imports more than 80% of its oil needs, with its reliance on foreign crude increasing as domestic production declines.
© 2022 AFP