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India’s central bank governor, Duvvuri Subbarao.DANISH SIDDIQUI/Reuters

India's central bank governor has warned that inflation is above acceptable levels and he called on the government to do more to support the flagging economy after a controversial decision to leave rates unchanged in the face of pressure for a cut.

In his first comments since the rate meeting, Duvvuri Subbarao said it is critical that the central bank contain demand pressures while the government works on easing supply bottlenecks in the economy, particular in food distribution.

The Reserve Bank of India shocked financial markets on Monday by leaving its 8 per cent policy repo rate and 4.75 per cent level for banks' required reserves unchanged. It released a statement after the decision saying a rate cut would "exacerbate" inflation, but Mr. Subbarao did not hold a press briefing.

The central bank came under intense pressure leading up to the meeting to ease policy to revive growth after data showed that the pace of expansion slumped in the March quarter to a nine-year low of 5.3 per cent.

On Tuesday, Mr. Subbarao defended that decision by saying that inflation was uncomfortably high.

"You will see that consumer inflation is not only higher, but is also on the uptrend," he said in a speech at an industry event.

"What that shows is that even if we have seen some moderation in wholesale price inflation, [it] does not transmit to consumer price inflation," Mr. Subbarao said.

Consumer price inflation in May was 10.36 per cent, unchanged from April and higher than March. Wholesale price inflation, the main inflation gauge in India, hit a 2012 high in March of 7.7 per cent before easing slightly to 7.6 per cent in May.

"The task for the Reserve Bank is to restrain demand to keep growth close to the potential growth rate. The task for the government is to support a supply response to raise the potential growth rate," Mr. Subbarao said.

Many economists say inflation in India is largely the result of supply bottlenecks, such as in food distribution where an estimated one-third of fresh produce is wasted.

Both Standard & Poor's and Fitch Ratings have threatened to cut India's credit rating from the lowest investment grade to junk. Apart from slowing economic growth and high inflation, they say the government is struggling to cut back its fiscal deficit and reform the economy to boost investment.

After the central bank's policy review on Monday, economists scaled back their rate cut expectations for the fiscal year ending March, 2013, a Reuters poll showed.

Mr. Subbarao said India needs to boost investment before pushing up consumption to bolster growth. It is important for a "poor" economy like India to grow at a much faster pace than now, he said.

The government tried to open up the retail sector to foreign investment in December, but opposition from partners in the ruling coalition forced it to backtrack. Earlier this year, uncertainty over plans to tax foreign investors sparked an exodus of funds.

Mr. Subbarao reiterated a need for the government to stick to its fiscal deficit target of 5.1 per cent of GDP in 2012-13, a goal that many economists view as optimistic. Analysts say a steep fiscal deficit increases the need for the government to borrow, which crowds out the private sector borrowers that could drive economic growth.

The Indian government must reduce spending and not just raise taxes for fiscal consolidation, Mr. Subbarao said.

Global and domestic companies have slowed investment in Asia's third-largest economy, fed up with a lack of change as the coalition struggles to push forward with reforms.

On Tuesday, India's benchmark index rose 1 per cent, recovering a bulk of its 1.4 per cent loss on Monday, as hopes the government would raise diesel prices as an initial step to improve its finances lifted oil stocks.

Mr. Subbarao, who spoke after the local stock, bond and foreign exchange markets had closed for the day, said the central bank will continue with its policy of intervening in the foreign exchange market. He blamed the depreciation of the currency on both global and domestic factors.

The rupee fell for a second session on Tuesday on the back of strong U.S. dollar demand from oil firms, while continued worries about euro zone debt also curbed some of the demand for risk assets.

Traders fear the rupee could make a renewed push to the record low at 56.52 hit against the dollar on May 31, and believe any breach below 56.20 may trigger intervention from the central bank.

The currency has fallen about 20 per cent against the dollar over the past year, adding to inflationary pressures.

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