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Yahoo! My Yahoo! Mail More Yahoo! Services Account Options New User? Sign Up Sign In Help Yahoo! Search web search Home Singapore Asia Pacific World Business Entertainment Sports Technology Singapore Asia Pacific World India shifts monetary gears as economy rebounds AFP - Sunday, January 31 Send IM Story Print India shifts monetary gears as economy rebounds Slideshow: Full Photo Coverage: Business & Economy NEW DELHI (AFP) - – India's central bank has shifted gear from the ultra-loose monetary policy used to help the economy rebound but it will go slow in hiking interest rates to ensure growth stays on track, analysts say. Late last week at a policy meeting, the central bank left borrowing rates at record lows to support continued expansion of Asia's third-largest economy. But in a bid to keep a lid on resurgent inflation, the bank took a key first step towards exiting from the aggressively expansionary stance that it adopted to help India's economy ride out the global slump. It moved to siphon off excess liquidity from the financial system by raising the cash reserve ratio -- the percentage amount commercial banks must keep on deposit -- by 75 basis points to 5.75 percent. "The central bank has embarked on a handle-with-care monetary exit," said Rajeev Malik, economist at Australia's Macquarie Securities. "Inflation has become more important, but the Reserve Bank of India has not taken its eyes off growth dynamics." Analysts say India's central bank is trying to achieve a delicate balance of curbing inflation -- which has accelerated in the past few months to 7.31 percent -- while not choking growth. Even though central bank governor Duvvuri Subbarao forecast strong economic expansion in his policy statement, he said he did not want to remove monetary stimulus too fast because the recovery is yet fully to take hold. And it is not only Indian policymakers who are performing such a juggling act as they wait for the economy to show clear signs of healing, the bank said. Worldwide there is "uncertainty about the pace and shape of global recovery" and whether it "will unravel" if stimulus is withdrawn prematurely, its report noted. India's economy expanded by 7.9 percent in the fiscal second quarter with car and mobile phone sales booming and the share market on a roll. But growth has been driven mainly by government stimulus, tax breaks and cheap interest rates that have provided vital juice for the economy during the worst global financial crisis since the 1930s. Also, while India's cost-of-living has risen steeply recently, the central bank says interest rate hikes cannot cure the problem in this instance. Food inflation, driven by crop shortages, is running at 17.4 percent and accounts for 80 percent of overall inflation, economists say. The weakest monsoon in nearly four decades has hit agricultural output but the central bank expects food costs to decline as new winter crops are harvested. After March, "inflation is likely to drop, and probably quite sharply," said HSBC economist Robert Prior-Wandesforde. However, analysts predict that as food inflation comes down, non-food inflation will begin emerging as a bigger problem as global commodity prices rise and demand improves on the back of a recovering economy. They expect that to prompt the central bank to slowly raise benchmark interest rates with the first hikes expected around April. After half a dozen rate cuts since October 2008, the repo -- the rate at which the bank lends to commercial banks -- stands at 4.75 percent, while the reverse repo, the rate at which it borrows from banks, is 3.25 percent. "We're seeing the beginning of monetary tightening" in India, said Vaibhav Agrawal, research vice-president at Angel Broking. "But the rate hike process will be gradual over a period of two years and will be unlikely to stifle demand," he added. 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