India’s central bank hiked cash reserve requirements for lenders but left key interest rates unchanged Friday as it tries to contain inflation without undermining an economic recovery.

The three quarters of a percentage point increase in the reserve requirement for banks to 5.75 per cent was more than expected. It will be carried out in two steps.

The Reserve Bank of India also raised its projection for economic growth for the fiscal year ending March from 6 per cent to 7.5 per cent. It says inflation will likely hit 8.5 per cent by March.

The bank said the hike in reserve requirements would drain 360 billion rupees ($7.8-billion) of liquidity from the financial system.

This is the first meaningful monetary policy reversal from the Reserve Bank, which has infused India’s trillion dollar economy with more than $125-billion in actual or potential liquidity since the global financial crisis hit in September 2008.

The new reserve requirements will be implemented with a half-point hike effective February 13 and a quarter-point hike on February 27.

Economists had expected a half-point increase in the cash reserve requirement and predict the bank will start raising policy rates by April, with cumulative increases of up to 1.25 percentage points over the next fiscal year.

As economic recovery takes root, central banks have begun to reverse monetary stimulus measures.

In October, Australia became the first major economy to raise interest rates since the outbreak of the financial crisis, hiking its key rate by a quarter point from a 50-year low.

Three weeks later, Norway followed suit.

This month, China ordered banks to set aside more reserves to staunch lavish lending and cool what could be a real estate bubble.

The Philippines inched toward a monetary policy reversal Thursday, resetting a short term interbank loan rate to pre-crisis levels, but left key lending rates unchanged.

India has emerged from the global bust faster than many expected, but much of its economic growth — which bounced back to 7.9 per cent in the July-September quarter — has been fuelled by extra government spending.

Goldman Sachs calculates that government spending contributed 40 per cent to 50 per cent of India’s total GDP growth in the year to September, and economists worry that hiking rates before private investment gains traction could undermine the recovery.

At the same time the Reserve Bank is struggling to cope with rampant food price inflation, which it has little power to contain.

In December, the headline wholesale price index jumped 7.3 per cent. Most of that rise was driven by food prices, which surged nearly 22 per cent, as India’s weakest monsoon in four decades and persistent distribution bottlenecks created supply side constraints, which monetary policy can’t do much to fix.

But as consumer demand and industrial activity pick back up, pushing up wage and input costs, non-food inflation has been rising as well.

Prices of manufactured products rose 5.2 per cent in December, up from a 0.5 per cent rise in September, suggesting that inflationary pressures have already begun to spread beyond drought-affected farm products.

“The RBI is exiting from its accommodative monetary stance and moving from managing crisis to managing recovery,” said Abheek Barua, chief economist at HDFC bank. “The implication is that going forward rates will start moving up.”

Beginning in September, the Reserve Bank cut the cash reserve ratio — the amount of cash banks must keep on hand — by 4 percentage points.

It also cut the benchmark repo rate — at which the central bank makes short-term loans to commercial banks — from 9 per cent to 4.75 per cent, and slashed the reverse repurchase rate — the rate at which it borrows from commercial banks — from 6 per cent to 3.25 per cent. Those policy rates were left unchanged Friday.

The bank began leaning toward a policy reversal at its last meeting, in October, by undoing some special measures to boost liquidity it introduced in late 2008.

The Reserve Bank also warned Friday that unwinding monetary stimulus will only be effective if the government also reigns in borrowing.

Mr. Barua said he expects the central government’s deficit to fall from 6.8 per cent of gross domestic product this fiscal year to 5.5 per cent next, which is still above targets.

“The RBI might say a lot publicly but it will have to live with the hard fact of high deficits and high borrowing for at least two or three years.”

The market took the policy decisions in stride, with the Bombay Stock Exchange’s benchmark Sensex index down 0.4 per cent, to 15,239.8 points, in midday trade amid steep falls elsewhere in Asia.