Inflation still too high, RBI chief Subbarao says

Reserve Bank of India (RBI) Governor Duvvuri Subbarao attends the monetary policy review meeting in Mumbai January 24, 2012.

PUNE (Reuters) - India's inflation rate is still high, the RBI governor said on Friday, suggesting that the bank is unlikely to loosen monetary conditions anytime soon to support faltering growth, despite a slight easing in prices last month.

Duvvuri Subbarao's comments come after data on Wednesday showed India's headline inflation rose 7.45 percent in October, unexpectedly dropping to its slowest pace in eight months.

Subbarao has previously said he expects price pressures to ease only in the first part of 2013, and has strongly indicated any cut in interest rates would likely come in January at the earliest.

The inflation data had raised hopes the Reserve Bank of India would consider a December rate cut, but the 10-year bond yield rose 1 basis point to 8.20 percent following Subbarao's comments as investors pared back some of that optimism.

"We're always on high alert, high alert about growth, about inflation certainly," Subbarao told reporters at the sidelines of a conference.

He added inflation at 7.5 percent was "still quite high."

The central bank has faced pressure from the government and industry to bring down the main policy rate from 8 percent, one of the highest in Asia, as the continent's third-largest economy expands at its slowest pace in nearly a decade.

Subbarao also said the central bank is prepared to issue new bank licenses, but only if all the appropriate conditions are put in place, reiterating the RBI's stance on allowing private companies to enter the sector.

The RBI has faced pressure from the government to start laying the groundwork towards issuing new banking licenses, but the central bank has stated it prefers to wait until the Banking Regulation Act is amended.

The amendment would give the central bank supervisory powers over the private companies that would enter the banking sector, but would need to be approved by parliament.

"We've been prepared in the Reserve Bank for launching this process but all the ground work, all the enabling conditions for launching this work have to be fulfilled," Subbarao said.

Finance Minister P. Chidambaram had called on the RBI on Thursday to start finalising guidelines and proceed to receive applications, saying the Banking Act would be amended.

"I have assured the RBI that the banking regulation act will indeed be amended, hopefully in the winter session or in the budget session," Chidambaram said in New Delhi on Thursday.

(Writing by Shamik Paul; Editing by Rafael Nam and Sanjeev Miglani)