India's central bank hikes interest rates; car, home loans to cost more

India's central bank raised key interest rates to rein in inflation that has soared to 13-year highs, officials confirmed Wednesday.

The Reserve Bank of India hiked the repurchase rate Tuesday, the rate at which it makes short-term loans to commercial banks, to 8.5 percent from 8 percent.

The bank raised the cash reserve ratio, or the share of deposits banks must keep with the central bank, to 8.75 percent from 8.25 percent. The cash reserve ratio would be increased in two stages starting next month.

Reserve Bank of India Governor Y. Venugopal Reddy described the hike in rates as painful but necessary.

"It has to be viewed in the context of the new reality of high and volatile energy prices that are not a temporary phenomenon any longer," he said according to the Press Trust of India news agency.

The central bank's move comes after the government announced last week that the wholesale price index _ the country's most-watched inflation rate _ had hit a 13-year high of 11.1 percent in first week of June. A year ago, the rate was 4.3 percent.

The hike in interest rates will likely mean higher rates on commercial bank loans for cars and homes.

"The industry urged the RBI not to raise interest rates, but this was done keeping in mind inflation," said Sajjan Jindal, president of trade body the Associated Chambers of Commerce and Industry of India. "India has no option but to live with it."