Too early to signal change in stance: RBI

Reserve Bank of India (RBI) Governor D Subbarao said on Friday it was important to bring down inflation to sustain growth and that it was too early to signal a change in monetary stance, suggesting the central bank may not be done with monetary tightening.

Speaking to a gathering of bankers in Kathmandu, Subbarao also said that US Federal Reserve's ultra-easy monetary stance has an impact on India in terms of rising commodity prices and capital inflows, and that capital controls had become advisable in some cases.

On Tuesday, the Fed decided to keep interest rates at ultra-low levels till mid-2013 and said it would be ready to take further policy measures if economic conditions deteriorate further.

The Fed's second quantitative easing which involved USD 600 billion of bond purchases led to massive capital inflows into emerging markets leading to rise in inflation and asset prices.

The RBI's policy has been to keep a lid on debt inflows through various quantitative limits on government bonds and external borrowing by companies.

"Capital controls are not only unavoidable but advisable in certain circumstances," he said, adding that India wanted only enough capital flows to bridge its current account deficit.

"There are lots of uncertainties. We will take all of them into account while we formulate our response in the mid-quarter policy (Sept 16)," he later told reporters. "It is too early to say that we will change our stance."

"Possibly we are sacrificing some growth in the short term, but reducing inflation is necessary to sustain medium-term growth," he said.

Headline inflation quickened to 9.44% in June, higher than the RBI's estimated 7% for end-March 2012.

That may keep the central bank's eyes firmly on inflation even as the US ratings downgrade and eurozone debt woes further muddies the global economic outlook.

Earlier in the day, Deputy Governor Subir Gokarn also said it was critical to keep inflation low as it could spiral if left unchecked. High inflation in India is driven by commodity prices and domestic demand, he said.

The comments from two top central bank officials may dash hopes that the RBI may pause in its tightening cycle, which has seen 11 rate hikes since March 2010, making it one of the most aggressive central bankers in the world.

In July, the RBI shocked with a 50 basis point hike, underlying its resolve to fight persistently high inflation which is expected to remain elevated till October.

The central bank has been more confident about the economy.

India's factory output clocked a stronger-than-expected growth in July, further reinforcing hopes that Asia's third largest economy was still growing robustly, though a tad slower.

Gokarn said that the central bank for now was sticking to its 8% growth projection for the current fiscal year that began April 1.