Inflation still high: RBI

NEW DELHI: India's inflation rate is still high by world standards and needs to be brought down further, the Reserve Bank of India deputy governor Rakesh Mohan said on Thursday.

Inflation, as measured in wholesale prices, breached 4 per cent in late January, its highest in nearly five months, and analysts have said the upswing meant the RBI was unlikely to loosen rates anytime soon despite slowing growth.

"Our inflation is still high by world standards and it needs to be brought down further," Mohan said at the Institute of Economic Growth in New Delhi. "The RBI's objective has been to ensure liquidity and still keep inflation and interest rates low."

Inflation is below the central bank's target of 5 percent for now, but it is expected to head up further in the weeks ahead due to high food and fuel prices, which are expected to remain a challenge in the 2008/09 fiscal year that starts on April 1.

At a policy review last month, the central bank left its key interest rates steady, saying inflation risks persisted. It had raised rates five times in 10 months from June 2006 to tackle inflation and credit growth in Asia's third-largest economy.

Benchmark 10-year bond yields rose 1 basis point to 7.47 percent as traders saw Mohan's comments as a sign that the central bank was unlikely to cut rates in the near term, despite worries about global growth and turmoil in financial markets.

Last week, the statistics office said India's economy was expected to grow 8.7 percent in 2007/08, slowing from the previous year as higher interest rates dent consumer demand.

Mohan, who outlined the challenges facing policy makers as India seeks 10 percent-plus growth rates in the next five years, said excessive credit growth could lead to an asset price bubble.

He said revenues need to be raised if the government wanted to meet its targets to lower the budget deficit and implement the recommendations for a pay rise for public service employees.

Economists say the government should not consider a surge in tax revenues as a windfall for it to spend as it has some big-ticket costs coming up, such as pay rises to over 3 million government workers in the next fiscal year.