Mumbai: The Reserve Bank of India (RBI) Governor said on Saturday there was no one-to-one link between global developments and Indian interest rates and it was still possible to contain inflation in the central bank's 5.0-5.5 percent range.
"There is no question of one-to-one correspondence but together you have to take into account the global economy," Reserve Bank Governor Yaga Venugopal Reddy said.
"And again, as I mentioned, the dominant consideration is domestic considerations. But weight for global factors is more than before."
Reddy had been asked if Thursday's 25 basis point increase in the key short-term rate by the US Federal Reserve would prompt his bank to follow in its next policy review at the end of July.
The Reserve Bank raised its main rate to 5.75 per cent from 5.50 per cent on June 8, responding to inflationary pressures and an increase in rates by monetary authorities across the world.
Many analysts expect another 25 basis point raise in India's key reverse repurchase auction rate on July 25, citing the buildup of inflation.
Sanjeet Singh, a fixed income analyst with ICICI Securities in Mumbai, said it was possible for the central bank to contain inflation within its end-March 2007 forecast of 5.0-5.5 percent but it could be difficult.
"A rate increases will be needed to attain the objective," Singh said. Reddy reiterated monetary policy cannot be "out of sync" with the rise in global interest rates. "The Fed could have raised by 25 or 50 basis points.
But these factors were in the air. The central bank is monitoring all global developments," he said. Reddy said the central bank had anticipated inflation to pass 5 per cent in its last policy review in April.
"Having said that, it's not unexpected. One must recognise that there are a few commodities for which there is some element of temporary supply shock," he said.
The wholesale price index measure of inflation rose 5.44 per cent in the year to June 17, the highest in more than a year. Reddy said headline inflation was high partly because it was understated in the past due to inadequate pass-through of prices.
He said prices of commodities such as wheat, sugar and pulses were high due to a mismatch in demand and supply, which should be addressed by policy makers.
"So if you ask me at the end of it all, subject to the monsoon and global factors, according to our assessment as of now it should still be possible to contain inflation in the range of 5.0 to 5.5 per cent," he said.
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