RBI: ready to act vs inflation if needed

By V. Ramakrishnan and Saikat Chatterjee

MUMBAI (Reuters) - The Reserve Bank of India (RBI) said on Monday it was ready to act against "unacceptably" high inflation if necessary but any steps needed careful thought.

Following the statement from Governor Yaga Venugopal Reddy, analysts said a tightening of cash conditions may be on the cards.

"We are in full readiness to take appropriate action if and when we make a judgement that any action is needed," Reddy told reporters after markets closed.

Annual inflation, as measured by wholesale prices, hit a 14-month high of 6.68 percent in mid-March, largely driven by food and manufactured product prices, and economists expect pressures to remain elevated for a few months.

Inflation is now well above the central bank's goal of around 5 percent for the fiscal year which ends on Monday and has caused concern in the government, which faces a series of state elections this year and a national election due by 2009.

But at the same time economic growth has slowed due to an interest rate-raising campaign in 2006 and 2007.

"Any decision to act has to carefully assess this extremely complex situation," Reddy said.

Analysts said the RBI was more likely to keep control on funds in circulation by lifting its cash reserve ratio (CRR) than raise rates outright.