India Central Banker Says Rates Will Follow Inflation.

GOA, India—Interest rates in India will come down only when there is a sustained fall in inflation, a deputy governor at the country's central bank said Sunday, indicating inflationary risks may stay its hand from easing monetary policy for now.

"We have to balance growth and inflation risks, and when we see the inflation risk being the dominant one, as we have seen now, we cannot afford to ignore that risk, especially since pressure points on food and oil prices are re-emerging," Subir Gokarn said at a conference of foreign-exchange dealers.

His comments echo those of fellow Reserve Bank of India Deputy Governor K.C. Chakrabarty, who Thursday pointed to the risks from rising food and oil prices that could weigh on the RBI's rate decision when it next meets in September.

The central held its lending rate steady at the past two rate-setting meetings, despite mounting pressure to cut in hopes of reviving growth in Asia's third-largest economy, now in its worst slowdown in nearly a decade.

The inflation rate for July, at 6.87%, was well above the bank's 5% comfort level, and worries of a spike in food prices have grown as weak seasonal rains have hurt farm-output prospects. Also deterring the RBI: rising global crude-oil prices.

The bank last reduced interest rates in April, by half a percentage point, the first cut in three years. Even then it warned of the inflation risks and urged the federal government to narrow its gaping and inflationary fiscal deficit. But the government has failed to push forward such measures as cutting down on subsidy payouts, which are straining its finances.

Economists have also been urging the government to help attract investors and revive growth by easing foreign-investment rules in such sectors as retail and civil aviation.

Mr. Gokarn said improving overall macroeconomic health would also help stabilize the rupee—down 17% against the U.S. dollar over the past year.

"The best policy for exchange-rate management is macrostability and concerted domestic policy actions, which will help offset global pressures," he said.

Mr. Gokarn also ruled out having the RBI pay interest on banks' cash reserves held with the central bank, saying that rules prohibited it and also that the RBI has "good reasons not to do so." He didn't elaborate.

Media reports recently said the government had sought to help improve liquidity by having the RBI pay 7% interest on deposits maintained by banks to meet their mandatory cash-reserve requirements.

Source : online.wsj.com​