* Frequent policy reviews reduces off-cycle action need
* Have not surrendered flexibility to take action when
(Updates to recast lede, adds details, quotes, background)
By Suvashree Dey Choudhury and C.J. Kuncheria
MUMBAI, Jan 7 India's central bank governor
Duvvuri Subbarao said on Friday a pause in its tightening cycle
should be interpreted as a comma and not a full stop,
indicating further monetary policy tightening going ahead.
Subbarao told a conference in New Delhi the central bank was
aiming to improve transparency and would not surprise markets
with unexpected actions.
"While we have not surrendered our flexibility to take
policy action as and when warranted, more frequent scheduling
of policy reviews reduces the need for off-cycle action and
thereby minimises the surprise element," Subbarao said.
The central bank is due to review its monetary policy on
Jan. 25 and is widely expected to raise rates by at least 25
basis points, after pausing in December, on the back of a surge
in inflationary pressure. [RBI/INT]
"Inside the Reserve Bank, the view was that within the
policy trajectory, it did not matter if we paused briefly as
long as we remained committed to the eventual outcome.
"The dilemma then boiled down to communicating to the
market that our action should be interpreted only as a comma
and not a full stop," he told a conference on the Dilemmas in
Central Bank Communication held in the capital city.
The Reserve Bank of India has been the most aggressive
major central bank in Asia, lifting interest rates six times
last year to fight surging prices being spurred by rising food
costs in an economy growing at nearly 9 percent.
A recent surge in food price inflation has triggered
analysts and dealers to expect the central bank to expedite its
policy tightening cycle.
The RBI has said last month it expects WPI inflation to
ease to 5.5 percent in the current fiscal year to end-March,
but also said inflationary risks are to the upside.
India's food inflation rose for the fifth straight week to
the highest in more than a year, reinforcing fears it has spilt
over to broader prices and cementing expectations of a January
interest rate hike. [ID:nSGE70600S]
Subbarao also said there was a dilemma in the market
between normal and neutral rates.
"It is, however, not possible to precisely define the
neutral rate for a rapidly growing and structurally
transforming economy like that of India. On the other hand,
'normal' rates can be broadly inferred from the crest and
trough of the policy rates over the growth-inflation cycle."
(Editing by Malini Menon)