The Reserve Bank of India raised its key rate by 25 basis points on Wednesday as expected, but surprised markets by leaving the door open for another close, saying core inflation remains up.

The central bank said its policy remains focused on domestic withdrawals. Many analysts expected Wednesday's hike to be the latest increase in the RBI's current tightening cycle, which has seen it raise rates by 250 basis points since May last year.

The Monetary Policy Committee (MPC), which consists of three members from the central bank and three members from outside, raised the key rate or repo rate to 6.50% in a split decision.

Four of the six people supported the decision.

“The global economic outlook is not as bleak today as it was a few months ago. Growth prospects in the major economies have increased, while inflation has declined, although it is still higher than the target in the major economies. The situation remains volatile and uncertain," RBI Governor Shaktikanta Das said in announcing the monetary policy committee's rate decision.

In a poll conducted ahead of the February 1 federal budget, more than three-quarters of economists, 40 out of 52, expected the RBI to raise the repo rate by a key basis. 25. Another 12 predicted no change.

The annual retail inflation rate eased to 5.72% in December from 5.88% in the previous month, falling below the RBI's upper tolerance band of 2%-6% for a second straight month.

But Das said core inflation remains elevated, and that further calibrated policy action was warranted.

"The stickiness of core or underlying inflation is a matter of concern. We need to see a decisive moderation in inflation," he said.

The Indian rupee slightly extended gains against the U.S. dollar after the rate decision. It firmed to 82.62 to the dollar from 82.67 before the announcement.

Meanwhile, bond yields also inched up with the benchmark bond yield rising to 7.3554%, from 7.3124% before the policy decision and the previous close of 7.3102%.

The Nifty 50 share index was up 0.72% to 17,849.85 as of 10:06 a.m. IST, while the S&P BSE Sensex rose 0.68% to 60,695.09