Struggling with growth-inflation dynamics: RBI

The Reserve Bank of India (RBI), widely expected to raise interest rates again next week, is struggling with its dual objectives of containing inflation and promoting growth, its governor said on Thursday.

"Growth-inflation dynamics, we are struggling with that. We recovered from the crisis sooner than other countries. Inflation also caught up with us sooner than other countries," said Duvvuri Subbarao, governor of Reserve Bank of India (RBI).

The RBI has raised its key lending rate, or repo rate, seven times by a total of 175 basis points since March 2010, and is expected to raise it by another quarter point on March 17 at its mid-quarter review.

"For inflation management we have to raise policy interest rates. For protecting, promoting and preserving recovery we need to keep interest rates low, so there is tension between raising interest rate policy and keeping them low," he said.

"There are many arguments for keeping rates low or raising rates and that's what we are struggling with," he said during a speech.

The RBI expects India's economy to grow at 8.5%, with an upward bias, for the fiscal year that ends this month.

For 2012, Finance Minister Pranab Mukherjee said last week he expects the Indian economy to grow at 9%, plus or minus 0.25%, in the next fiscal year, which is above many private forecasts.

HIGH INFLATION

High inflation has been the key driver for the RBI's recent policy moves.

India's food and fuel inflation eased in late-February, but remained at elevated levels, maintaining the case for further monetary tightening to keep a lid on headline inflation.

India's food price index rose an annual 9.52% in the week to February 26, slower than a 10.39% rise in the previous week as prices of vegetables, potatoes and rice declined, data showed on Thursday.

The fuel price index climbed up 9.48% in the same week from 12.56% a week earlier.

Headline inflation in January was at 8.23%, well above the RBI's perceived comfort zone of 4-5% and compared with its end-March target of 7%.

Brent crude rose for a second day on Thursday to surpass USD 116 per barrel. It reached a two-and-half year high of USD 119.79 on February 24. U.S. crude gained 44 cents to USD 104.65, after touching a two-and-half year peak of almost USD 107 earlier this week.

With crude oil prices near a two-and-half year high, central banks across Asia are under pressure to act for fear that these costs will fuel broader inflationary pressures in the economy.