Indian Central Bank Is Addressing High Inflation

BHUBANESWAR, Orissa—India's high food inflation is mainly due to supply-side constraints, and the central bank has been taking steps to control a buildup in inflationary expectations, its governor said Saturday. "Monetary policy becomes the first line of defense, so if inflation persists for a long time, people think inflation is going to be high, and that becomes a self-fulfilling prophecy," D. Subbarao said at an event in Bhubaneswar, the capital of the eastern Indian province of Orissa. "To break that inflationary-expectations psyche, [Reserve Bank of India] has to act, which is why we have been acting over the last year," he said. The central bank has raised its policy rates seven times in the past year.  Authorities have been grappling with high inflation as food prices increased owing to rising demand and choked supplies after unseasonal rains damaged some crops late last year. Mr. Subbarao declined to comment on the likelihood of an interpolicy-meeting rate move by the RBI. Earlier this month, he said that the central bank can act at any time to deal with the evolving macroeconomic situation. This fueled expectations of a rate increase, possibly before the next scheduled policy review March 17 if inflation didn't cool fast. "Notwithstanding scheduled quarterly and mid-quarterly reviews, we reserve the right to alter our policy stance at any time to respond to the evolving macro economic situation," Mr. Subbarao had said. Food inflation climbed slightly after two consecutive weeks of decline, accelerating to 11.49% in the week to Feb. 12 from 11.05% in the previous week, government data Thursday showed. The general inflation rate was at 8.23% in January, and the government expects it to ease to 7% by the end of the current fiscal year in March. High prices have led to protests from opposition lawmakers and public outcry in a country where more than 40% of the 1.2 billion population lives on less than $2 a day. Rising prices of crude oil and other commodities globally have stoked worries of intensifying inflationary pressures, which could further erode the spending power of the country's poor. High inflation also would lead to more monetary action, with most economists predicting the RBI could increase policy rates by 0.5 to 1.0 percentage point in 2011.