Inflation dropped in line with market expectations for the week ended July 21 from 4.41 per cent for the previous week on the back lower prices for food items such as pulses, fruits and eggs.

According to the wholesale price index -- India's most closely watched cost-of-living monitor -- inflation stood at 4.72 per cent for the sane period a year ago.

The latest inflation figures came after the Reserve Bank of India in its quarterly policy review on Tuesday kept its key repo rate steady at 7.75 percent.

But the bank warned hawkishly that "inflationary pressures remain and are more persistent than before, along with high commodity and asset prices."

In an effort to cool credit 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.

The Reserve Bank of India said billions of dollars of foreign investment in the stock market this year has flooded banks with the cash that is fuelling a boom in consumer and business spending.

Analysts say the central bank could call for a further rise in the cash reserve ratio if the problem of excess liquidity does not ease.

This week's inflation figure was comfortably within the central bank's medium-term target of 4.0 to 4.5 percent for the next three to four years and well below its goal of five percent for this fiscal year to March 2008.

Earlier this year, inflation rose to a two-year high of close to seven percent -- prompting the central bank to warn that the economy was showing signs of overheating.

India's economy expanded by a scorching 9.4 percent in the 2006-07 financial year and similar strong growth is forecast this year.

SHARES SEEN VOLATILE

NEXT WEEK

Another report from Mumbai adds: Indian share prices are set to experience another week of volatile trade as investors and funds continue to be impacted upon by sentiment from uncertain global market trends, dealers said.

For the week to August 3 the Indian benchmark fell 96.17 points or 0.63 percent to 15,138.4 amid concerns overseas funds could exit emerging markets over US credit problems associated with subprime mortgages.

Earlier this week, the Reserve Bank of India hiked its cash reserve ratio (CRR) for banks by 50 basis points to seven percent in a bid to check excess liquidity, while keeping short-term borrowing rates unchanged.

The central bank 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.

"(In the context of) the hawkish tone on inflation and financial risks and the latest CRR hike, further tightening can not be ruled out," said Manika Premsingh, economist at brokerage Edelweiss Securities.

India's inflation eased to 4.36 percent for the week ended July 21 from 4.41 percent for the previous week, official data on Friday showed, after the central bank held benchmark interest rates steady earlier in the week.