The Reserve Bank of India (RBI) logo is pictured outside its head office in Mumbai January 25, 2011. REUTERS/Stringer/Files
By Suvashree Dey Choudhury and Tony Munroe
MUMBAI (Reuters) - The Reserve bank of India (RBI) on Monday said high inflation warrants continued tight monetary policy, despite rising growth risks, reinforcing expectations that it will increase interest rates by a quarter point at its policy review on Tuesday.
The 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," RBI 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.
The Reserve Bank said some moderation in investment and consumption demand is likely, as inflation eats into purchasing power and tighter monetary policy curbs demand.
"The downside risks to growth emerge from uncertainties relating to Southwest monsoon, likely moderation in private consumption and investment demand, high input costs, escalating cost of capital and uncertain global outlook," the RBI said.
India's economy, Asia's third-largest, grew at a slower-than-expected 7.8 percent in the quarter that ended in March. For the full fiscal year it grew 8.5 percent, and the central bank said growth of around 8 percent was likely for the current fiscal year.
"The emerging growth risks are likely to be factored in the policy reaction," the central bank said.
The RBI warned of near-term upside risks to inflation, and said even near-normal summer monsoon rains may not ease food prices because of a rise in government-set minimum food prices.
High levels of capacity utilisation, rising wages, and the prospect that electricity prices will increase could add to inflationary pressure, it said.
"There are upside risks to inflation from still-incomplete pass-through of global commodity prices, downward stickiness of food prices, recent revisions in minimum support prices and evidence of wage price spiral," the central bank wrote.
RBI 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 amid signs of slowing domestic growth and global uncertainty.
"At the outset, it is hawkish. RBI is going to hike by 25 bps tomorrow and show a hawkish bias," Kumar Rachapudi, Singapore-based fixed income strategist at Barclays Capital, said after Monday's RBI report.
Since March 2010, the RBI has raised the repo rate by a total of 275 basis points to 7.50 percent.
However, inflation remains well above the 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.
(Additional reporting by Neha D'silva)
