India can't afford to be lax on inflation, Central Bank says

The central bank raised its economic growth forecast to 7.5 percent in the fiscal year through March 2010, from an earlier estimate of 6 percent, and increased its inflation forecast to 8.5 percent from 6.5 percent. 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 percent of gross domestic product between September 2008 and April last year, helping the South Asian nation's economy grow 7.9 percent in the three months ended Sept. 30, the fastest pace in 18 months.

Industrial production climbed 11.7 percent 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.”

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