WRAPUP 1-India Finance Min wants balanced approach on rates

* Inflationary consequences of stimulus minimal-PM

* Need to support growth, contain inflation - Fin Min

* Cbank may hike CRR by 50 bps in Oct policy- Morgan Stanley

By Neha D'silva

MUMBAI, Oct 9 (Reuters) - India's stimulus measures are unlikely to fuel inflation and should remain in place because the economy was running below capacity, the prime minister said as debate intensified over when to exit from easy monetary policy.

Government officials have been stressing the need to stick with pro-growth policies since the central bank governor said on Monday the question facing India was how and when to start unwinding some of its expansionary policy settings.

Prime Minister Manmohan Singh said Asia's third-largest economy was not operating at full capacity, pegging growth in the fiscal year to March 2010 at 6.3 to 6.5 percent, which would be a seven-year low.

"Until that capacity limitation is reached, I think the inflationary consequences of the stimulus are likely to be minimum," he said on Friday.

Earlier, Finance Minister Pranab Mukherjee called for a balanced approach on interest rates to support both growth and contain inflation, and said economic growth was expected to pick up from the current October to December quarter.

"We shall have to attain growth at the same time not with the runaway inflation. Inflationary pressure also needs to be restrained," Mukherjee told the ET Now channel.

Inflation has been forced up by high food prices after the weakest monsoon since 1972, and is expected to keep climbing in the months ahead. That leaves the central bank with the dilemma of needing to contain price pressures without undermining an economic recovery. [ID:nDEL447462]

"In our view, the recovery in growth and likely rise in WPI inflation implies that RBI will need to start normalizing interest rates," Morgan Stanley economists said in a report on Friday, referring to the Reserve Bank of India.

Rates rises would likely start in January, and the investment bank expected the repo rate to be increased by 150 basis points over 2010 from its record low of 4.75 percent.

"Note this potential rate hike is unlikely to derail recovery as we see this increase in policy rates as a move towards normalization rather than tightening that hurts growth," the Wall Street bank wrote.

Before then, the RBI could raise its cash reserve ratio for banks by 50 basis points at an Oct. 27 policy review, Morgan Stanley economists Chetran Ahya and Tanvee Gupa wrote.

EXIT

On Monday, Reserve Bank of India (RBI) governor Duvvuri Subbarao said there was broad agreement India needed to wind back some of its easy policy stance but there were risks if the move was mistimed.

Nevertheless, India would exit its accommodative monetary policy before advanced economies, he said. [ID:nBOM474507]

The comments and an Australian central bank rate rise on Tuesday sparked speculation in Indian markets that some of the massive stimulus steps taken to shore up the economy against the global slowdown might soon be withdrawn.

That pushed up swap rates to 2009 highs on Wednesday, although they eased after Mukherjee said India needed more time before deciding on an exit from accommodative policy. [ID:nBOM435828]

As the global crisis hit harder than expected last year, the RBI slashed banks' reserve requirements, pumped cash into markets and, between October 2008 and April, cut its key lending rate 425 basis points. The government increased spending and cut taxes and duties to shore up activity.

Growth in Asia's third-largest economy slowed to 6.7 percent in 2008/09 from rates of 9 percent or more in the previous three years. (Additional reporting by Kriittivas Mukherjee in NEW DELHI; Editing by John Mair and Andy Bruce)