RBI has done enough on inflation: Gokarn

The Reserve Bank of India has taken adequate measures to manage inflation and expects food inflation to ease on good monsoon rains, a deputy governor at the central bank said on Friday.

The statement calmed markets that had feared further steep rate hikes to rein in double-digit inflation. It also echoed the views of government officials who have said price rises would ease with normal monsoon rains despite a record of forecasts that have underestimated inflation.

(For HIGHLIGHTS: Deputy governor's comments, click http://in.reuters.com/article/idINIndia-50675920100806)

Food inflation has eased to 9.53 percent in the week to July 24 from more than 17 percent in January this year, on account of good monsoon rain, a fall in seasonal prices of fruits and vegetables, and the release of government food grains in the market.

"We have done enough to manage inflation. We expect to see the effects in the second half of the year because policy actions act, or have an effect, with a lag," said Subir Gokarn, one of the four deputy governors at the Reserve Bank of India (RBI), who runs the monetary policy division.

"You will see them manifested over the next few months."

The wholesale price index, India's most closely watched inflation measure, is expected to record a sixth month of double-digit rises in July.

(For a graphic on monsoon rain, please click http://graphics.thomsonreuters.com/F/07/IN_MNSRF0810.gif)

India's 10-year benchmark bond yield fell as much as 8 basis points after his comments.

At 12:43 p.m. (0710 GMT), the yield on the benchmark 10-year bond was down 8 basis points at 7.81 percent from before the comments. It had closed at the day's high of 7.91 percent on Thursday, its highest since May 7.

The statement follows media reports last week saying that central bank deputy governor K.C. Chakrabarty was stripped off his portfolio after reported off-the-record comments calling for more forceful policy to tame inflation -- possibly a sign of dissent within the bank over how to rein in price rises.

DEMAND PRESSURES

Analysts say food prices may moderate in coming months, but due to food inflation spreading to non-manufacturing industries the central bank could raise policy rates by 25 basis points in its next policy review on September 16.

"On the demand side, clearly capacity constraints are beginning to show in indicators of demand side inflation," Gokarn said, adding the central bank was trying to address demand pressures through rate actions.

Since March, India's central bank has raised its main lending rate by a total of 100 basis points to 5.75 percent and the borrowing rate by 125 basis points to 4.50 percent.

Price rises are a hot political issue and Finance Minister Pranab Mukherjee told parliament on Wednesday that rising prices were a cost that Asia's third-largest economy was paying for fast economic growth.

The central bank lifted its inflation forecast for the fiscal year ending March 31 to 6 percent from a previous forecast of 5.5 percent, while the economy is expected to grow at 8.5 percent.

"I think the concern now is not really food inflation, which is easing, but core inflation which is shooting up and is reflecting demand-side pressures," said N.R. Bhanumurthy, economist with the National Institute of Public Finance and Policy, a New Delhi-based think-tank.

"The situation is worrisome and I expect at least another 25 basis points hike in the offing."

Gokarn said the impact of a fragile global recovery on capital inflows and commodity prices would ease inflation pressures.

"If global growth is slow, the commodity prices tend to soften and that will act to contribute to inflation management."

Referring to liquidity, Gokarn said the economy had moved from excess liquidity to a deficit or balanced scenario.

"If you look at the change in the call rate, which is effectively the anchor for the short term for the yield curve, it has gone up by the sum of the both reverse repo and the corridor."