RBI says rate pause not a full stop

Reserve Bank of India's Governor Duvvuri Subbarao speaks during a meeting with bankers in Mumbai April 21, 2009.

MUMBAI (Reuters) - Reserve Bank of India (RBI) governor Duvvuri Subbarao said on Friday a pause in its tightening cycle should be interpreted as a comma and not a full stop, indicating further monetary policy tightening going ahead.

Subbarao told a conference in New Delhi the central bank was aiming to improve transparency and would not surprise markets with unexpected actions.

"While we have not surrendered our flexibility to take policy action as and when warranted, more frequent scheduling of policy reviews reduces the need for off-cycle action and thereby minimises the surprise element," Subbarao said.

RBI is due to review its monetary policy on Jan. 25 and is widely expected to raise rates by at least 25 basis points, after pausing in December, on the back of a surge in inflationary pressure.

"Inside the Reserve Bank, the view was that within the policy trajectory, it did not matter if we paused briefly as long as we remained committed to the eventual outcome.

"The dilemma then boiled down to communicating to the market that our action should be interpreted only as a comma and not a full stop," he told a conference on the Dilemmas in Central Bank Communication held in the capital city.

The Reserve Bank of India has been the most aggressive major central bank in Asia, lifting interest rates six times last year to fight surging prices being spurred by rising food costs in an economy growing at nearly 9 percent.

A recent surge in food price inflation has triggered analysts and dealers to expect the central bank to expedite its policy tightening cycle.

The RBI has said last month it expects WPI inflation to ease to 5.5 percent in the current fiscal year to end-March, but also said inflationary risks are to the upside.

India's food inflation rose for the fifth straight week to the highest in more than a year, reinforcing fears it has spilt over to broader prices and cementing expectations of a January interest rate hike.

Subbarao also said there was a dilemma in the market between normal and neutral rates.

"It is, however, not possible to precisely define the neutral rate for a rapidly growing and structurally transforming economy like that of India. On the other hand, 'normal' rates can be broadly inferred from the crest and trough of the policy rates over the growth-inflation cycle."

(Editing by Malini Menon)