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Tuesday, November 10, 2009

RBI faces higher inflation, capital flows

India is facing a dilemma of needing to contain rising inflation while trying to support growth and managing foreign capital inflows, Reserve Bank deputy governor Shyamala Gopinath said on Tuesday.

Inflationary pressures in India were higher than those in developed countries, but tightening policy too early could not only weaken recovery and attract more capital inflows which would complicate policymaking further.

"India is actively confronted by an upturn in inflation," she said in a speech at a banking event, adding the timing of the withdrawal of supportive monetary policy might diverge considerably between developed and emerging nations.

"Capital flows have resumed on India's growth prospects," Gopinath said, saying the costs and benefits needed to be considered in managing the impact of foreign fund flows.

"On that backdrop, we really need to consider the exit from expansionary policy because we cannot be an outlier here." In its monetary policy review last month, the central bank noted the return of capital flows, and said they could add to domestic liquidity and there was a risk they could help create asset-price bubbles.

The benchmark stock index is up 70 percent this year, boosted net foreign funds inflow of more than $14 billion.

Gopinath said India's purchase last month of 200 tonnes of gold from the International Monetary Fund at an average price of $1,045 an ounce were not related to capital inflows.

India's annual wholesale price inflation rate was 1.51 percent in mid-October. The Reserve Bank expects inflation to rise to around 6.5 percent by end-March, the end of the fiscal year, and some analysts see it at around 8 percent.

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