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Last Updated: Tuesday, 30 October 2007, 10:21 GMT
India keeps its eye on inflation
Indian investors
India is enjoying an economic boom
India's central bank has sought to cool inflation further by raising the proportion of funds that lenders must keep in reserve rather than lend out.

Moving to cut the amount of rupees in circulation, the Reserve Bank of India (RBI) has raised the cash reserve ratio of central banks from 7% to 7.5%.

Its move comes as the Indian economy enjoys rapid growth, and the country's main share index has hit record highs.

The rupee has also been reaching nine-year highs against the US dollar.

The RBI said it still expected the economy to grow 8.5% in the year to 31 March 2008.

Investment inflow

While the central bank increased the level of funds that lenders have to keep in reserve, it chose to keep the main interest rate for lending at 7.75%, as expected.

Given the balance of risks, it is appropriate to stay hawkish
Shuchita Mehta, Standard Chartered

The latest move by the RBI comes as foreign investment continues to flood into India.

This is both because of the country's economic boom, but also because of the continuing weakness of the US dollar, which makes India and the rupee an even more attractive investment.

While Indian inflation fell to a five-year low this month - 3.06% - the RBI said inflationary pressures remained.

"Given the balance of risks, it is appropriate to stay hawkish, appropriate to manage capital flows and liquidity management remains clearly its priority," it said.

Tighter stock rules

Analysts broadly welcomed the RBI's latest move.

"Given the balance of risks, it is appropriate to stay hawkish," said Mumbai-based Standard Chartered Bank economist Shuchita Mehta.

As India's economic boom continues, its main share index, the Sensex, this week broke through the 20,000-point level for the first time.

To better control the surge in overseas investment in Indian stocks, India's market regulator said last week that it would be phasing out a system that allowed some foreign investors, such as hedge funds, to buy shares anonymously.

The move was a response to concerns that these unregistered investors could too easily pull out, leading to a sudden drop in share prices in the future.

US Treasury Secretary Henry Paulson, who is concluding a visit to India, said he hoped the new rules would be both flexible and transparent.

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