India's central bank focuses on inflation amid turmoil

Mumbai: In an increasingly complex and uncertain world, India's central bank is likely to focus in the next few months on one thing it knows it can do something about - inflation.

While US recession worries and a steep difference in interest rates with the world's largest economy may create cross-currents for India's markets, analysts say its central bank is more likely to risk a slight slowdown in growth from high interest rates than let lingering price pressures accelerate.

The Reserve Bank of India (RBI) kept its key rates steady at its quarterly review last week, saying the domestic economy was strong, and disappointing those who had bet on a cut after the US Federal Reserve slashed its rates.

But it will be gauging capital flows over the coming weeks, to see if worldwide market turbulence makes foreign investors pull funds from India's high-flying stock market or, confusingly, plough them in in search of yield.

"I think the situation is very much in flux at the moment. It is an awkward situation for the RBI because inflation is rising and the risks are very much to the downside to growth," said Rob Subbaraman, economist at Lehman Brothers.

Annual wholesale price inflation, India's most widely watched inflation measure, has held below the central bank's comfort zone of five per cent for the past seven months. It stood at 3.83 per cent in early January but has crept up recently. Furthermore, consumer prices are rising at about six per cent a year.

The central bank, which ultimately aims to get inflation down to three per cent in coming years, says pressures are suppressed because government-controlled diesel and petrol prices have not been raised to keep pace with a rise in crude on world markets.

It is also worried that food prices worldwide are on the rise. It can do little to solve supply constraints but it can try to mitigate some risk by keeping rates high to dampen demand.

India has for weeks been debating whether to raise retail fuel prices, but prices of essential commodities are a political hot potato as hundreds of millions of poor voters feel the pinch immediately.