Chidambaram says RBI move to moderate inflation

NEW DELHI (Reuters) - India expects demand and inflation to moderate following a recent monetary tightening by the central bank and after fiscal steps taken by the government, the finance minister said on Friday.

The Reserve Bank of India (RBI) said on Thursday it was raising the cash reserve ratio, the proportion of deposits banks must keep with it, by 50 basis points to 8 percent to calm inflation in Asia's third largest economy. The rise will take place in two phases, on April 26 and May 10.

"It will moderate demand. Therefore, it will have a moderating effect on prices," Finance Minister Palaniappan Chidambaram told reporters after a function.

But he added: "It will take some time. Don't expect miracles."

Government data showed on Thursday the wholesale price index rose 7.14 percent in the 12 months to April 5, slightly less than expected and falling from the previous week's rate of 7.41 percent, which was the highest since November 2004.

The central bank had said it wanted to keep inflation at close to 5 percent by the end of the 2007/08 fiscal year on March 31 and its medium-term aim is to contain inflation around 3 percent.

The RBI's surprise move on Thursday follows several duty cuts and export bans ordered by the government in recent weeks to ease price pressures.

Chidambaram said inflation in India has been fueled by global price spikes in crude oil, metals and food products.

"We can take some steps domestically but we don't have control over international prices," he said.