The rise in borrowing costs is likely to infuriate business leaders, who are already worried about growing signs of slackening domestic demand in Asia's third-largest economy.
But the Reserve Bank of India said it may be the last rate hike this year.
"The likelihood of a rate action in the December mid-quarter review is relatively low," RBI Governor Duvvuri Subbarao said in a statement on the bank's website.
"If the inflation trajectory conforms to our projections, further rate hikes may not be warranted."
The latest rise of 25 basis points takes the RBI's repo rate at which it lends to commercial banks to 8.50 percent and increases the reverse repo -- the rate it pays banks for deposits -- by the same level to 7.
50 percent.
Finance minister Pranab Mukherjee said last week that "dark clouds" were casting a shadow on India's economy with the central bank cutting its growth forecast for the current financial year to March 2012.
Expansion in Gross Domestic Product (G