China has taken another step to pull down the inflationary pressures by raising the reserve ratio for the second time in the month of January.

The People’s Bank of China has raised the rate of deposits by the banks to the central bank by 50 basis points. This move of the central bank of China is taken to prevent the World's third largest economy from overheating. The increased reserve requirement will be effective by February 25, the People’s Bank of China said on its Web site today.

The current level is 16% for big banks and 14% for smaller ones. After the hike the new levels will be 16.5% and 14.5% respectively for big banks and small banks. The announcement by People's Bank of China surprises markets and also the traders who were not expecting another hike as in January as the inflation reading was posted unexpectedly low.

The Chinese central bank first increased the banks’ reserve requirements on January 12 this year.  The central bank said that it needs to take some harsh decisions before inflation starts to gain pace. This move of central bank will soak up more funds from the financial system and is expected to lock up an estimated CNY350 billion in liquidity. However, the global markets are getting nervous by the step of PBOC. They are suspecting that the demand from the third largest economy of the world would get slowed because of the tighter monetary conditions.