Important to bring inflation closer to target, say India MPC members

By Swati Bhat

MUMBAI (Reuters) - Despite signs of inflation having peaked in India, the outlook remains highly uncertain, and bringing the retail price rise closer to the target of 4% is essential to help sustain economic growth over the medium term, members of the central bank's monetary policy committee said.

"Although inflation seems to have peaked, it is still unconscionably high," Reserve Bank of India deputy governor Michael Patra said in minutes of the MPC's recent meeting published on Friday.

"Risks to the trajectory of inflation in the form of currency depreciation, seasonal pressures and the monsoon's uneven progress could upend the moderation in momentum recently recorded," he added.

India's consumer inflation dipped to 6.71% in July, easing for the third month in a row, helped by a slower increase in food and fuel prices but continues to remain above the RBI's mandated target band of 2%-6% for a seventh straight month.

"The upside risks to any declining inflation trajectory in the short term are significant," external member Shashanka Bhide wrote, adding that sustaining the growth momentum being seen will also require a reduction in inflation rate.

Most members sounded optimistic about the country's growth prospects as compared to other global and emerging market economies.

"FPI (foreign portfolio investors) are returning because India has better prospects among emerging markets, and the crash in currency and stock markets that they were waiting for in order to re-enter is proving unlikely," MPC member Ashima Goyal said.

Foreign investors have purchased net government bonds worth $501.70 million between Aug.1 and Aug. 17, while they have been net buyers of around $5 billion equities, latest clearing house and exchange data showed.

Foreign funds had sold shares worth $27.7 billion between January and July.

The Indian economy is running a positive growth differential vis-a-vis the rest of the world, Patra wrote.

"Our monetary and liquidity actions have been aimed at ensuring continued macroeconomic and financial stability that could set the foundation for a high growth trajectory over the medium term," RBI Governor Shaktikanta Das said.

"We will continue with 'whatever it takes' approach, given the new set of challenges and very high uncertainties that we are confronted with," he added.

($1 = 79.87 Indian rupees)

(Reporting by Swati Bhat; Editing by Maju Samuel)