Volatile prices of food and commodity prices have pushed inflation higher and the most urgent priority for central bankers is to calm nerves on inflation, Reserve Bank of India Governor YV Reddy said.
"The most urgent and short-term priority for central bankers at the current juncture seems to be to calm the nerves about inflation or to anchor inflation expectations, with an implicit recognition that a somewhat elevated headline inflation in the short-term may be difficult to avoid," Reddy said in a speech delivered in Manchester on July 1.
A copy of the speech was posted on the central bank's web site on Friday.
"Further, high inflation rates when accompanied by higher variability of inflation raises greater uncertainties," he said. "These acute policy dilemmas at the current juncture between growth and inflation have to be faced in the background of financial turbulence which is yet to calm down."
India's annual inflation rate rose to 11.63 per cent on June 21, its highest since the annual numbers in the current series began in 1995. It was 11.42 per cent a week earlier.
Reddy said higher and volatile prices of food, energy and other commodities were causing a significant upside bias to inflation around the world, complicating the conduct of monetary policy at the time of financial stress.
"Further, while rising energy prices may be an exogenous shock for several countries, for the global economy as a whole it is endogenous," he said.
Reddy said underlying demand conditions in India had warranted the RBI's policy tightenings in June.
The central bank raised its key lending rate twice in the month, increasing it from 7.75 per cent to 8.50 per cent, its highest since March 2002. It also announced a half percentage point increase in the cash reserve ratio - the portion of the deposits that banks must keep with the RBI in cash.