High inflation warrants continued tight policy

MUMBAI: India's central bank on Monday said high inflation warrants continued tight monetary policy despite rising risks to growth, reinforcing expectations that it will increase interest rates by a quarter point at its policy review on Tuesday.

The Reserve Bank of India (RBI) has raised interest rates 10 times since March 2010, but headline inflation remains above 9 percent.

"Persisting high inflation and its expected slow decline warrant that the Reserve Bank continue with its anti-inflationary policy stance," the central bank wrote in its quarterly report on macroeconomic and monetary developments.

The RBI's survey of forecasters lowered its expectations for growth in the fiscal year that began in April to 7.9 percent from 8.2 percent previously, while raising its outlook for wholesale price index inflation to an average of 8.6 percent from 7.5 percent earlier.

"Going forward, some moderation in investment and consumption demand is likely, as high inflation may erode purchasing power. The anti-inflationary monetary policy stance is also likely to soften the demand," the central bank wrote.

India's economy grew at a slower-than-expected 7.8 percent in the quarter that ended in March.

"The emerging growth risks are likely to be factored in the policy reaction," the central bank said.

India's central bank has been one of the most aggressive in tightening policy over the last year and stepped up its fight against stubbornly high inflation in May, raising interest rates by a bigger-than-expected 50 basis points and vowing to battle price pressures even at the cost of some economic growth.

All 23 analysts in a Reuters poll last week expect the RBI to raise rates by 25 basis points on Tuesday, although 9 of them expect a pause in the tightening cycle after July.

Since March 2010, the RBI has raised the repo rate by a total of 275 basis points to 7.50 percent.

However, inflation remains sticky at elevated levels and well above RBI's March 2012 projection of 6 percent.

"Monetary policy will have to preserve the broad thrust on tight monetary stance till there is credible evidence of inflation trending close to a level within the Reserve Bank's comfort zone," the report said.

The RBI's comfort zone for inflation is 4.0-4.5 percent.