Priority is to calm inflation nerves - RBI

MUMBAI (Reuters) - Volatile prices of food and commodity prices have pushed inflation higher and the most urgent priority for central bankers is to calm nerves on inflation, the Reserve Bank of India (RBI) governor said.

"The most urgent and short-term priority for central bankers at the current juncture seems to be to calm the nerves about inflation or to anchor inflation expectations, with an implicit recognition that a somewhat elevated headline inflation in the short-term may be difficult to avoid," Yaga Venugopal Reddy said in a speech delivered in Manchester on July 1.

A copy of the speech was posted on RBI's Web site wwww.rbi.org.in on Friday.

"Further, high inflation rates when accompanied by higher variability of inflation raises greater uncertainties. These acute policy dilemmas at the current juncture between growth and inflation have to be faced in the background of financial turbulence which is yet to calm down," he added.

India's annual inflation rate rose to 11.63 percent on June 21, its highest since the annual numbers in the current series began in 1995. It was 11.44 percent a week earlier.

Reddy said higher and volatile prices of food, energy and other commodities were causing a significant upside bias to inflation around the world, complicating the conduct of monetary policy at the time of financial stress.

"Further, while rising energy prices may be an exogenous shock for several countries, for the global economy as a whole it is endogenous," he said.

Reddy said underlying demand conditions in India had warranted the RBI's policy tightenings in June.

The RBI raised its key lending rate twice in the month, increasing it 75 basis points to 8.50 percent, its highest since March 2002. It also announced a 50 basis point increase in banks' reserve requirements.

Reddy said India had largely avoided the global financial contagion from the subprime crisis, partly because its credit derivative market was in its infancy, its financial distribution model not comparable with advanced economies and because of curbs on local investors buying financial products issued overseas.