RBI also raised the inflation projection to 4.6 per cent in second quarter of fiscal 2019, 4.8 per cent in second half of 2018-19 and 5 per cent in first quarter of 2019-20.
The projected inflation rate is above its targeted comfort level of four per cent.
Based on an overall assessment, the Reserve Bank of India said that the Gross Domestic Product (GDP) growth projection for 2018-19 is retained, as in the June statement, at 7.4 per cent.
In the shorter term, the Bank Rate implied by a so-called equilibrium real interest rate, or "r*", was likely to be somewhat lower, the BoE said but it did not give an estimate.
The Bank of England, like the US Federal Reserve and European Central Bank, is trying to gradually unwind the easy-money policies it deployed during the financial crisis to keep the economy afloat.
And with unemployment at its lowest rate in more than 40 years, it thinks pay increases will continue to pick up, creating inflation pressure.
The average interest rate on an easy access account at one of the "big five" high street providers is now only 0.23%. "However, RBI chose to walk the talk and the rate hike is a win-win situation for both markets and the banks as inflation is expected to rapidly decelerate to sub-5 per cent in coming months and it would have been hard for RBI to hike then and convince the markets", the SBI report suggested.
BoE Governor Mark Carney has said all bets on future BoE rate hikes would be off if there is a no-deal Brexit. The interest rate was hiked to 6.5 percent last time in April 2016.
Mark Carney: "What banks pay (.) in terms of returns, partly depends on what it costs them to borrow in worldwide markets, and that had been very low at the time of the last rate increase".
SNP economy spokesperson Kirsty Blackman MP added: "The hike in interest rates will deliver a further blow to the living costs and standards of millions of families across the United Kingdom, who are already feeling the squeeze as prices rise too fast".
"For example, those paying off the UK's average mortgage debt, with a variable rate mortgage face paying an extra £17-£18 per month, which adds up to an extra £200 per year or more than £6,000 over the life a 30-year loan term".
Economists had been predicting the rise given that the economy had performed in line with the Bank's last forecasts in May, when it backed off from a widely anticipated hike to wait and see how the economy recovered after a weather-hit start to the year.
Yes Bank's managing director and chief executive officer, Rana Kapoor, said, "With peak of CPI inflation now behind us, and monetary transmission playing out gradually hereon, I expect a pause in the remainder of FY19".