SYDNEY: India can't afford to be lax about fighting inflation as the nation seeks to slow price gains to 5% or less, central bank Deputy Governor K.C. Chakrabarty said yesterday.

"You cannot afford to be in any way lax in monitoring inflation and controlling it," Chakrabarty said in an interview in Sydney. "We would not like to have more than 4 or 5% inflation. That's the challenge."

Central Bank Governor Duvvuri Subbarao raised the amount lenders are required to set aside as reserves last month to prevent excess money in the banking system from fanning price gains. India's wholesale-food inflation rate rose to 17.56% in the week to Jan. 23, moving closer to an 11-year high and fueling speculation that Subbarao may raise interest rates.

India's "inflation is edging up, and that's why you see we have already exited from the monetary stimulus, almost exited," Chakrabarty said. "We hope that this will anchor inflation" expectations.

Consumer-price inflation in India is the highest among Asia-Pacific countries, according to data compiled by Bloomberg. Prices paid by industrial workers rose 14.97% in December from a year earlier, the most in 11 years, while consumer-price inflation for farm workers in the country accelerated to 17.21%.

The benchmark wholesale-price inflation rate was 7.31% in December, the highest in 13 months.

Monsoon Rains

Food costs are rising as the June-to-September monsoon rains, the main source of irrigation in Asia's third-largest economy, were the weakest since 1972, hurting agriculture.

The Reserve Bank of India hopes to cool inflation to 4% or 5% in 2011 or 2012, Chakrabarty said. Price gains won't come to that level "so soon," the deputy governor said, without saying if he was referring to consumer or wholesale prices.

The central bank on Jan. 29 increased the so-called cash reserve ratio by 0.75%age points to 5.75%, a move it estimates will drain about 360 billion rupees ($7.7 billion) from the banking system. Subbarao left the benchmark reverse repurchase rate unchanged at 3.25%.

"Our main policy instruments are all currently at levels that are more consistent with a crisis situation than with a fast-recovering economy," Subbarao said at the time. "It's therefore necessary to carry forward the process" of exiting them, he said, signaling the central bank may boost policy rates as growth strengthens.

Growth Forecast

The central bank raised its economic growth forecast to 7.5% in the fiscal year through March 2010, from an earlier estimate of 6%, and increased its inflation forecast to 8.5% from 6.5%. The Reserve Bank will give a forecast for the following year in April, Chakrabarty said.

The government injected fiscal and monetary stimulus of more than 12% of gross domestic product between September 2008 and April last year, helping the South Asian nation's economy grow 7.9% in the three months ended Sept. 30, the fastest pace in 18 months.

Industrial production climbed 11.7% in November, the fastest pace in two years, as stimulus measures stoked demand for cars made by Maruti Suzuki India Ltd., the plasma screens of the Indian unit of LG Electronics Inc., and Hero Honda Motors Ltd. motorcycles.

Global stocks plunged last week while bond default risks soared after Greece's biggest union approved the second mass strike this month and tax collectors began a 48-hour walkout, showing that Prime Minister George Papandreou's parliamentary majority may not be enough to implement his plan to cut the European Union's largest deficit.

"Any time anywhere sovereign crisis is happening, we need to be cautious," Chakrabarty said. "But we hope that we don't have much exposure to these small countries until it affects the other economies. I think if it is controlled at the Greece level, I don't think" it will spread.

India's financial markets "are more or less stable," he added. "With higher growth it has to have the stability."