The Reserve Bank of India (RBI) chief said on Monday the country is facing surging inflation and it needs to calibrate monetary policy in order to manage inflation and also support growth. The RBI will hold its quarterly monetary policy review on January 25, when it is widely expected to raise rates by at least 25 basis points. The RBI is seen raising rates by a total of 75 basis points in 2011.

“A lot of other countries are still flirting with deflation … still concerned that they might have deflation. On the other hand we are having a surging inflation,” RBI Governor Duvvuri Subbarao told a group of university students.

“For the Reserve Bank the challenge is to calibrate monetary policy taking into account the demands of inflation management and the demand of supportive recovery,” he said.

The most-traded 8.08 per cent 2022 bond and second most-traded 8.13 per cent 2022 bond moved up 2 basis points to 8.23 per cent each after the governor’s comments on inflation.

The benchmark five-year swap and the one-year rate rose 5 basis points each to 7.99 per cent and 7.41 per cent, respectively.

Traders said that despite Subbarao’s comments, the market still expects only a 25 basis points increase in key rates at next week’s policy review after a sharp dip in industrial production growth in November.

India’s annual headline inflation accelerated to 8.43 per cent in December on rising food prices. The country’s economy is forecast to grow by at least 8.5 per cent in the fiscal year that ends in March.

“When I meet other central bank governors, they tell me: ‘why don’t you give us a bit of your inflation.’ That’s how desperately they want some inflation and how desperate we are to control our own inflation,” Subbarao said.

India’s annual industrial output in November grew at its slowest in 18 months, but the central bank is likely to stay on course and raise interest rates later this month to combat inflation.

India’s chief statistician, TCA Anant, said at the same event on Monday that the government is not particularly happy with the pace of revival in the manufacturing sector.

“The revival has not kept pace at least in manufacturing,” he said.

“The growth is there but it is not so strong that we would be happy with. That is really the concern,” he said.

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