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RBI chief warns inflation unacceptable
MUMBAI (Reuters) - The Reserve Bank of India governor warned inflation is above acceptable levels and he called on the government to do more to support the flagging economy after a controversial decision to leave rates unchanged in the face of pressure for a cut.
In his first comments since the rate meeting, Duvvuri Subbarao said it was critical that the RBI contained demand pressures while the government works on easing supply bottlenecks in the economy, particular in food distribution.
The RBI shocked financial markets on Monday by leaving its 8 percent policy repo rate and 4.75 percent level for banks' required reserves unchanged. It released a statement after the decision saying a rate cut would "exacerbate" inflation, but Subbarao did not hold a press briefing.
The RBI came under intense pressure leading up to the meeting to ease policy to revive growth after data showed that the pace of expansion slumped in the March quarter to a nine-year low of 5.3 percent.
On Tuesday, Subbarao defended that decision by saying that inflation was uncomfortably high.
"You will see that consumer inflation is not only higher, but is also on the uptrend," he said in a speech at an industry event.
"What that shows is that even if we have seen some moderation in wholesale price inflation, (it) does not transmit to consumer price inflation," Subbarao said.
Consumer price inflation in May was 10.36 percent, unchanged from April and higher than March. Wholesale price inflation, the main inflation gauge in India, hit a 2012 high in March of 7.7 percent before easing slightly to 7.6 percent in May.
"The task for the Reserve Bank is to restrain demand to keep growth close to the potential growth rate. The task for the government is to support a supply response to raise the potential growth rate," Subbarao said.
Many economists say inflation in India is largely the result of supply bottlenecks, such as in food distribution where an estimated one-third of fresh produce is wasted.
Both Standard & Poor's and Fitch Ratings have threatened to cut India's credit rating from the lowest investment grade to junk. Apart from slowing economic growth and high inflation, they say the government is struggling to cut back its fiscal deficit and reform the economy to boost investment.
After the RBI's policy review on Monday, economists scaled back their rate cut expectations for the fiscal year ending March 2013, a Reuters poll showed.
Subbarao said India needed to boost investment before pushing up consumption to bolster growth. It was important for a "poor" economy like India to grow at a much faster pace than now, he said.
The government tried to open up the retail sector to foreign investment in December, but opposition from partners in the ruling coalition forced it to backtrack. Earlier this year, uncertainty over plans to tax foreign investors sparked an exodus of funds.
Subbarao reiterated a need for the government to stick to its fiscal deficit target of 5.1 percent of GDP in 2012/13, a goal which many economists view as optimistic. Analysts say a steep fiscal deficit increases the need for the government to borrow, which crowds out the private-sector borrowers that could drive economic growth.
The Indian government must reduce spending and not just raise taxes for fiscal consolidation, Subbarao said.
Global and domestic companies have slowed investment in Asia's third-largest economy, fed up with a lack of change as the coalition struggles to push forward with reforms.
On Tuesday, the BSE Sensex rose 1 percent, recovering a bulk of its 1.4 percent loss on Monday, as hopes the government would raise diesel prices as an initial step to improve its finances lifted oil stocks.
Subbarao, who spoke after the local stock, bond and foreign exchange markets had closed for the day, said the central bank will continue with its policy of intervening in the foreign exchange market. He blamed the depreciation of the currency on both global and domestic factors.
The rupee fell for a second session on Tuesday on the back of strong dollar demand from oil firms, while continued worries about euro zone debt also curbed some of the demand for risk assets.
Traders fear the rupee could make a renewed push to the record low at 56.52 hit against the dollar on May 31, and believe any breach below 56.20 may trigger intervention from the RBI.
The currency has fallen about 20 percent against the dollar over the last year, adding to inflationary pressures.
The Indian benchmark 10-year bond yield fell 4 basis points to 8.39 percent, after gaining 9 basis points in the previous session, on hopes the RBI would buy bonds through its open market operations.
After the close of market, the central bank said it would buy up to $2.14 billion of bonds on Friday.
(Additional reporting by Aradhana Aravindan, Writing by Suvashree Dey Choudhury; Editing by Neil Fullick, Ron Askew)
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