China is prepared to increase interest rates and banks' required reserve ratios (RRR) further in 2011, a government think-tank said in a report published on Tuesday.

China may increase the bank deposit reserve ratio to 23 percent from the current 19.5 percent, according to a report by the State Information Centre under the National Development and Reform Commission.

The tool of (RRR) will be the first choice for the central bank, the think-tank concluded in the report that was published in the China Securities Journal.

As part of China's monetary policy toolbox, the People's Bank of China is also expected to permit the yuan CNY=CFXS to rise further, it added.

Other analysts have also suggested that bank reserve requirements would be the key weapon for China's central bank to drain money from the Chinese economy.

China's central bank raised interest rates last Tuesday, the second time in just over six weeks, intensifying a battle against stubbornly high inflation in the rapidly expanding economy.