NEW DELHI, Feb 13: India's central bank tightened monetary policy on Tuesday for a second time in two weeks to fight accelerating inflation, hiking the amount of cash commercial banks must keep on deposit.

The Reserve Bank of India said it was raising the cash reserve ratio to 6pc from 5.5pc to take money out of the banking system and try to slow rapid credit growth that is helping fuel inflation.

“In view of the paramount need to contain inflation expectations and in the light of current liquidity conditions, it has been decided to increase the cash reserve ratio,” the bank said in a statement on its web site.

The move, which the bank said, would suck 140bn rupees, or $3.17bn, from the banking system, had been forecast by economists after inflation hit a more than two-year high of 6.58 per cent last Friday.

Inflation now is riding significantly above the 5-5.5 per cent tolerance limit set by the Reserve Bank, based in India's financial capital, Mumbai.

“This is a very sharp move, they are directly siphoning money out of the system ... this is a move to control the demand side,” said D.K. Joshi, principle economist at Indian credit rating agency Crisil in New Delhi.

The government last week estimated growth at 9.2pc for the financial year to March 31, 2007, after the economy expanded by nine per cent a year earlier.

Monetary policy authorities are trying to allow Asia's fourth-largest economy to move onto a higher growth path without letting inflation get out of control.

—AFP