India's central bank walks an inflation tightrope

       India's central bank faces a tricky balancing act in fighting inflation expected to surge in coming months and keeping the country's fragule economic recovery on track, economists say.
       Central banks across the world are facing similar dilemmas after cutting interest rates aggressively in the face of the world financial crisis and now having to decide when to start tightening policy as recoveries take root.
       Asia's third-largest economy reported a return to inflation last week as a result of soaring food costs fuelled by a bad monsoon and economists said they expected further sharp price rises in the months ahead.
       Annual inflation, which had been in negative terrain for 14weeks, rose 0.12 per cent for the week to September 5, according to the latest Wholesale Price Index (WPI) figures, India's most watched cost-of-living benchmark.
       "In the coming weeks, inflation is expected to rise on a sustained basis, up to 7 per cent by March 2010," said Siddhartha Sanyal, economist at Edelweiss Securities. Some analysts believe inflation could hit eight per cent by March.
       The resurfacing of inflation, along with a still nascent economic recovery, has confronted the central bank with a dilemma about when to take the first steps to tighten monetary policy to keep a lid on prices. Reserve Bank of India governor Duvvuri Subbarao struck a hawkish tone last week, saying "inflationary pressure [in India] is a more urgent concern" than elsewhere, raising the prospect he might move before other central bankers.
       But at the same time, he said, "We will not exit from the accommodative monetary policy unless we are assured recovery is secure."
       Economists said Subbarao's words under-socored the delicate nature of the bank's task.
       "A timely exit policy is critical to achieve the fine balance between avoiding risks to domestic asset prices and choking early signs of growth recovery," Sanyal said.
       The economy grew by 6.7 per cent in the year ended March 31 - the slowest rate since 2003 and down from 9 per cent a year earlier.
       The central bank expects growth of "around 6 per cent" for the current fiscal year - still strong by anemic world standards but not enough to make a dent in India's widespread poverty.
       In coming months, the bank may raise the percentage of cash commercial banks must keep in reserve - the cash reserve ratio - instead of hiking policy lending rates directly, analysts said.