The Reserve Bank of India said in a quarterly review that while inflation had fallen below its five percent forecast for the year to March 2008 from nearly seven percent earlier this year, commodity and asset price rises remained a concern.

"While inflation has been steady, inflationary pressures remain and are more persistent than before, along with high commodity and asset prices," central bank governor Y.V. Reddy said in a statement.

In an effort to cool demand, the central bank cut the amount of money available for loans by hiking the commercial banks' cash reserve requirements by 50 basis points to seven percent.

Inflation accelerated to 4.41 percent in the week to July 14 from 4.27 percent the previous week.

"This is a surprisingly nervous (policy) in relation to inflation. It is the most hawkish stance the bank has taken relating to financial risks," said Manika Premsingh, economist with brokerage BRICS Securities.

Analysts had expected the central bank to keep its benchmark repo rate at a four-year high of 7.75 percent, which was reached after five hikes between June 2006 and March this year in an effort to tame inflation in the fast-growing economy.