UPDATE 1-INTERVIEW-India rate rise cycle near peak-deputy c.bank gov

Mon Sep 19, 2011 11:15pm IST

(Updates, adds background, graphic, more quotes)

By Sujata Rao

LONDON, Sept 19 (Reuters) - India faces inflation of close to 10 percent in the September-November period but price pressure should moderate from December, meaning an 18-month rate rise cycle is near its peak, a deputy governor of the Reserve Bank of India (RBI) said on Monday.

India raised interest rates last week for the 12th time in 18 months to 8.25 percent and signalled more was to come. Rates now stand at 8.25 percent and a Reuters poll of analysts shows one more hike is expected this year. .

"The main motivation for the hike was that we are expecting headline inflation to remain above 9 percent and close to 10 percent for the next three months -- September-October-November," Subir Gokarn told Reuters in an interview.

"It would be fair to say we are near the peak. Whether we are at the peak or not is not a judgement I can make."

The central bank struck an unexpectedly hawkish note in its post-meeting statement and Gokarn said concerns over inflation expectations would have made it risky to call a halt or even a pause to the tightening cycle.

Indian inflation rose to 9.78 percent in August, the highest in a year and among the highest in the world. Gokarn acknowledged some indicators, such as weaker industrial output, could have justified a pause last week but for the fact that inflation is expected to stay elevated for some months to come.

The rupee too has been weakening, recently touching a two-year low against the dollar which Gokarn admitted was "not consistent with the anti-inflationary stance."

He added however: "We anticipate the inflation trajectory will turn down in December for two reasons -- the base effect and the cumulative effect of rate hikes on demand....That's an indication the peak is in sight."

"To say this is a sort of aggressive anti-inflationary stance in perpetuity is clearly not right, there are clearly indications that we do expect to see a turnaround."

India's economy is cooling rapidly, meanwhile, with growth in the three months to June, at 7.7 percent, the lowest in six quarters and well below the 8.5 percent of the previous fiscal year that ended in March.

Industrial output growth slumped to 3.3 percent in July, its weakest annual pace in nearly two years.

The RBI's continued hawkishness puts it at odds with global peers who are more focused now on reviving weak demand but Gokarn said slower growth would have to be accepted in order to stamp out inflation.

"We do see signs of growth moderating but they are not dramatic," Gokarn said. "The IP number of course was a strong negative signal but looking at tax, credit growth and the analysis of corporate performance, none of these suggest a very dramatic slowdown."

He said a soft landing was already under way and the RBI was trying to manage monetary policy in a way that would not allow economic growth to dip too far below 8 percent.

"It may go there for some time but it wont stay there," he said.

While that level would be enviable in most countries, it remains well below hopes for double digit growth that would alleviate poverty.

India's stubborn inflation problem stems to a large extent from the government's lack of progress on key reforms that would drive investment in infrastructure and agriculture and alleviate supply-side bottlenecks.

That has left the onus of arresting near double-digit inflation almost entirely to the RBI. Gokarn declined to comment on the reform paralysis but stressed this backdrop made it essential for the central bank to stay focused on its inflation-fighting mandate.

"If other things are not helping and if they are in fact moving the inflation trajectory in the opposite direction than it is up to (central bank) to do what it can to offset that effect," he said. (Reporting by Sujata Rao; Editing by John Stonestreet, Ron Askew)

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