India's central bank today unexpectedly ordered the country's lenders to set aside more reserves in an attempt to cut inflation, the second such move in less than two weeks.

At the same time the government imposed new export taxes on steel products and basmati rice, a move designed to cap sharply escalating prices of staple goods and placate an increasingly disgruntled electorate ahead of central elections next year.

The Reserve Bank of India (RBI) raised its cash reserve ratio (CCR) to 8.25 per cent from 8 per cent, a move that will withdraw about 90 billion rupees from the country's banking system. The RBI had previously announced a 0.5 percentage point hike in the CCR on April 17.

The RBI did not raise the repo rate – at which it lends short-term money to banks – a move that was widely expected against a background of surging inflation, but which economists said would have placed too heavy a burden to India's slowing economy.

Sonal Varma, the Lehman Brothers economist, said: "This was a prudent policy response, in our view, to the difficult challenge of slowing growth yet rising inflation. We judge that a repo hike would have been too damaging for an economy already weakening."

India's most closely watched inflation gauge, the wholesale price index, hit an annual pace of 7.33 per cent for the week to April 12 and has been well above the RBI's comfort threshold for two months.

In a statement that demonstrated a newly hawkish tone the RBI left the door open to further tightening of monetary policy, saying it would "act decisively…to curb any signs of adverse developments in regard to inflation expectations."

Rajeev Malik, the JP Morgan economist, said: "The policy statement was hawkish, placing increased emphasized on price and financial stability, and on anchoring inflation expectations."

Mr Malik added that the central bank's growth forecast of between 8 per cent and 8.5 per cent for the Indian economy now appears optimistic in the wake of "tighter monetary policy for longer than previously thought along with softening external demand."

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