Inflationary pressure to continue: RBI report

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India will continue to face inflationary pressures and private credit demand will strengthen in the current financial year that began in April, a Reserve Bank of India (RBI) report said on Thursday.

"Inflation pressures will remain and private credit demand will be stronger with the threat of crowding out becoming quite real," the central bank report said.

The RBI research report on Currency and Finance focuses on global financial crisis and the Indian economy.

The crisis suggests the need for a cautious approach to the pace and scope of capital account liberalisation, the report noted.

"The crisis has taught the important lesson that forex market intervention to contain sharp and disruptive depreciation is no longer a sin and reserves are a new virtue," the report stated.

Releasing the report, RBI Deputy Governor Subir Gokarn clarified that the comments in the study do not necessarily reflect the views of the central bank.

The report said the reversal of monetary accommodation would not be effective until there is a reduction in government borrowing.

Inflation for March touched a high of 11.04%, the highest so far in 2010, and has been hovering close to 10% since then. The recent decision to free up petrol prices and a hike in other state-subsidised fuel prices have added to further upward pressure on the price index.

India's food price inflation eased to its lowest annual growth in eight months, dampened by a weakening base effect. The food price index rose 12.92% in the year to June 19, lower than the previous week's annual rise of 16.90%, government data showed on Thursday.

Gokarn said India's economic recovery has been strongly consolidated in the early part of 2010, but the central bank is also watching European developments in the context of its policy making.

"As a result of policy actions, the impact (of global crisis on India) was relatively short-lived and from the second part of 2009 we have started to see increasing signs of recovery which have certainly been strongly consolidated in the early part of 2010," said Gokarn.

"The developments in Europe do suggest that some of the weaknesses related to the crisis are still remaining and we are clearly watching those developments in the context of our policy making as well."

The report stated that monetary policy decisions should be sensitive to sources of inflation.

"Thus, central banks need to adopt a more flexible approach and strengthen their capacity to provide liquidity and respond to systemic shocks," the report said.

It also said more co-ordination among finance ministries, central banks, and regulators is expected while developing exit strategies from the monetary and fiscal expansions that were undertaken to slacken the pace of the global economic slowdown.