(Updates to add details, quotes)
By Neha Dasgupta
PUDUCHERRY, India, Oct 4 (Reuters) - India's central bank
governor said on Thursday inflation had to be brought down
further, signalling the bank would stick to a hawkish stance,
and the size of the fiscal deficit would be a key factor in
determining monetary policy.
The Reserve Bank of India (RBI) has kept its key policy repo
rate unchanged since April because of inflationary pressure and
widening fiscal and current account deficits.
Many economists expect the rate to remain unchanged at an
Oct. 30 policy review.
"We must recognise, it was above 10 percent, it has come
down from double-digit level to what is now at 7.5 pct. So
first, we have to acknowledge that inflation has come down, we
need to bring it down further," Governor Duvvuri Subbarao said.
"The number of things that are necessary for inflation to
come down, we will take into account, as we go into our October
30 policy," Subbarao said after a central bank board meeting.
On Wednesday, RBI Deputy Governor Subir Gokarn, who heads
the monetary policy department, also sounded tough on fiscal
prudence, saying the government had to cut subsidies.
Last month, Finance Minister P. Chidambaram unveiled a
series of steps to bring in reforms in the retail and aviation
sectors and also raised diesel prices as concern over a
sovereign downgrade threat loomed.
Armed with those measures to improve investor sentiment,
Chidambaram has stepped up pressure on the central bank to cut
rates, but analysts consider the reform measures as too small to
soften the central bank's anti-inflationary stance.
A high fiscal deficit due to increased government spending
eats into private investment and pushes up inflation.
New Delhi aims to contain the fiscal deficit at 5.1 percent
of gross domestic product for the 2012/13 fiscal year that ends
in March, but industry watchers are apprehensive there will be
further fiscal slippage.
The fiscal deficit in the April-August period touched 65.7
percent of the full year target.
"Unless government binds itself to lower fiscal deficit
targets, it will be difficult to make a case that the recent
steps will lead to fiscal consolidation," said A. Prasanna,
economist at ICICI Securities Primary Dealership.
"For RBI to cut rates, it needs both the conditions to be
satisfied - falling inflation and a credible roadmap for fiscal
consolidation," Prasanna said.
India's inflation has remained sticky and well above the
central bank's March-end target of 7 percent, and is expected to
rise further till December due to the recent fuel price
India's wholesale price index rose a higher-than-expected
7.55 percent in August from a year earlier, mainly driven by
higher food prices.
(Writing by Shamik Paul)