MUMBAI, India — INDIA’S central bank raised its key interest rate by half a percentage point yesterday, its ninth hike in just over a year, warning that persistent inflation is threatening growth in Asia’s third-largest economy.

The bank said the short-term lending rate — or repo rate — will go from 6.75 per cent to 7.25 per cent, a sharper hike than expected, and warned that growth would slow to around eight per cent this fiscal year from 8.6 per cent last fiscal.

The move was seen as a sign that the Reserve Bank of India (RBI) is willing to sacrifice short-term growth to control inflation, dismaying business groups and investors, who sent the benchmark Sensex index down 2.4 per cent yesterday.

“Persistent high inflation undermines growth,” Reserve Bank Gov D Subbarao said. “If we want to sustain growth in the medium term, we need to bring down inflation. We sacrifice a little now for much more later.”

India suffers from the worst inflation of any major Asian economy despite the Reserve Bank’s aggressive rate hikes, suggesting that curing the problem will require structural reform, rather than monetary policy alone.

High oil prices, loose fiscal policy and supply constraints have muted the impact of the Reserve Bank’s long fight against inflation. The bank had raised the effective policy rate by 3.5 percentage points prior to yesterday’s move. That put pressure on growth, with capital goods production and investment softening, but it hasn’t been enough to contain inflation, which came in at a higher-than-expected nine per cent in March.

Reserve Bank deputy governor Subir Gokarn said in an interview that India’s inflation outpaces the region because of supply bottlenecks and because food, which has been a major driver of price rises, constitutes such a high percentage of the inflation basket — 27 per cent for the headline Wholesale Price Index and from 46 to 69 per cent of India’s various consumer price indices.

Gokarn said monetary policy remains effective in controlling core inflation — the cost of non-food manufactured goods, like automobiles and construction materials — which constitute 55 per cent of the Wholesale Price Index.

“That is quite sensitive to monetary policy,” he said. “What happens elsewhere, in terms of food and energy is clearly beyond our control.”

He said fiscal consolidation and better production and distribution of food — especially protein products like pulses, milk and eggs, which are in greater demand as Indians get richer — are critical to easing prices.

“The domestic supply response is critical,” he said.

The bank said it expects inflation to remain near nine per cent for the first half of the fiscal year before softening to six per cent by next March.

The bank expects economic growth to slow to between 7.4 per cent and 8.5 per cent this fiscal year, if monsoon rains are normal and crude oil prices average US$110 a barrel.

That is lower than New Delhi’s projection of nine per cent growth and dents the ruling Congress party’s hopes of using the gains of double-digit growth to alleviate poverty and create jobs for millions of young Indians. Most Indians live on less than US$2 a day.

“They’ve acknowledged they are willing to sacrifice some growth to control inflation,” said Samiran Chakraborty, head of India research at Standard Chartered in Mumbai. “This is a sea change in monetary policy.”

Wages in India have been rising faster than inflation, crimping corporate margins along with higher input costs.

“Inflation expectations arising from the demand side need to be contained,” Chakraborty said. “This rate hike was needed to make sure we’re not into a wage price spiral.”

Business leaders decried the Reserve Bank of India’s move as too aggressive.

“We are afraid that with growth slowing down, as now admitted by the RBI, employment targets will not be achieved and this could generate greater social pressure,” Rajiv Kumar, director general of the Federation of Indian Chambers of Commerce and Industry, said in a statement.

Chandrajit Banerjee, director general of the Confederation of Indian Industry, urged the government to move forward on long-delayed reforms in agriculture, land use and foreign investment.

“The continued monetary tightening without any movement on structural reforms to address supply side bottlenecks will have an added impact on capacity creation and expansion,” he said.

The bank said that from now on it will set only one policy rate, the repo rate, and fix the reverse repo rate — or short-term borrowing rate — at one percentage point below the repo rate. Yesterday’s rise automatically brings the reverse repo rate to 6.25 per cent.