“Our inflation is still high by world standards and it needs to be brought down further,” Mr Mohan said at the Institute of Economic Growth in New Delhi.

“The RBI’s objective has been to ensure liquidity and still keep inflation and interest rates low,” Mr Mohan said adding that slower inflation will keep interest rate low.

Inflation breached four per cent in late January, its highest in nearly five months, and analysts have said the upswing meant the central bank was unlikely to loosen rates anytime soon despite slowing growth.

Inflation is below RBI’s target of five per cent for now, but it is expected to head up further in the weeks ahead due to high food and fuel prices, which are expected to remain a challenge in the 2008-09 financial year. While India is the most stable nation in terms of macro-economic policy, it faces a challenge in managing high credit growth, he pointed out adding that recent cuts in lending rates by banks are in line with the policy of RBI. The economic and financial environment hasn’t changed since RBI announced its monetary policy at the end of January, he said.

Price bubble

At a policy review last month, RBI left its key interest rates steady, saying inflation risks persisted. It had raised rates five times in 10 months from June 2006 to tackle inflation and credit growth in Asia’s third-largest economy.

The RBI Deputy Governor, who outlined the challenges facing policy makers as India seeks 10 per cent-plus growth rates in the next five years, said excessive credit growth could lead to an asset price bubble.

He said revenues need to be raised if the government wanted to meet its targets to lower the budget deficit and implement the recommendations for a pay rise for public service employees.

Economists say the government should not consider a surge in tax revenues as a windfall for it to spend as it has some big-ticket costs coming up, such as pay rises to over 3 million government workers in the next fiscal year.

The recent cuts in lending rates by banks are in line with the policy of the Reserve Bank of India, the RBI Deputy Governor said.

The economic and financial environment hasn't changed since the bank announced its monetary policy at the end of January, the central  bank official pointed out.