Inflation will soon fall to 3 pc: RBI

Tokyo: India's central bank governor expressed confidence on Monday that the bank would be able to slow inflation down to closer to 3 per cent well before the timeframe of its midterm inflation goal of 4 to 4.5 per cent.

The Reserve Bank of India aims to keep inflation close to 5 per cent this fiscal year, and had set a goal of bringing it down to 4.0 to 4.5 per cent in the midterm. "Well before the medium term, we should be able to bring it closer to 3 per cent," RBI Governor Yaga Venugopal Reddy said in a panel discussion at a symposium in Tokyo on India's economy.

India's annual inflation rate fell below 5.5 per cent in early May for the first time in five months after running above 6 per cent for most of this year.

Speaking at the same seminar, Bank of Japan Governor Toshihiko Fukui said he saw signs of increasing inflationary pressure in India.

But in the longer term, India needs to take further steps to make its regulation and tax codes more effective, balance its need for both fiscal consolidation and building infrastructure, and create a more flexible labour market, Fukui added.

"India will need to overcome those medium-term challenges to continue achieving sustainable high growth, while appropriately controlling inflationary pressure," Fukui said.

Fukui added that India's manufacturing sector is becoming competitive and gaining profitability, catching up with its strong service sector.

"I think the potential for the Indian economy to achieve sustainable growth will increase if it moves to a more balanced economy with manufacturing and service sectors both working as the engines for growth," Fukui said.

Reddy said the RBI expects the nation's economic growth to slow to 8.5 per cent in the financial year to March 2008 from 9.2 per cent in the previous year, reflecting an expected slowdown in global economic growth.

But he added that underlying structural factors to keep the nation's growth momentum around 9 per cent, such as the economy's increasing productivity and robust household consumption, will likely remain.

Reddy reiterated that the central bank is aiming to bring down annual inflation to close to 5.0 per cent in the financial year ending March 2008, below the average rate of 5.4 per cent in the last fiscal year.

The level of India's inflation "cannot be too much out of alignment" with that of the global economy as the nation gets increasingly integrated with the rest of the world, Reddy said.

"Therefore, we feel we should, in the medium-term, bring down inflation and inflation expectations closer to 4 per cent," he said.

Asked by Fukui why the RBI, unlike other central banks, has been using wholesale prices, rather than consumer prices, in guiding monetary policy, Reddy said the RBI should ideally use the consumer price index as the target for monetary policy to make international comparisons easier.

But the central bank has been unable to do so because India does not have a single CPI that covers a broad range of industries, he said, adding that the bank is asking the government to create such an index.

On the nation's plan for fuller capital account liberalisation, Reddy reiterated that the Indian central bank will relax capital controls in a gradual manner.

"Going forward, India plans to continue a gradualist approach," Reddy told the seminar.