Mumbai: The Reserve Bank of India (RBI) governor Y V Reddy said the central bank is all geared up to act as the inflation rate jumped to a four-year high. The annual rate of inflation based on the wholesale price index rose to 8.24 per cent for the week ended May 24 from 8.1 the previous week, the fastest since August 2004.

The spike in inflation was mainly driven by higher costs of fuel, power and light, basic metals, including steel and food grains, in the week ended May 24.

Reddy said the central bank would take all necessary steps - ''both conventional and unconventional'' - to contain the rising inflation.

The RBI has so far kept the base lending rate unchanged at 7.75 per cent although it raised cash reserves for banks twice to limit demand. The benchmark 10-year bond yield also remained unchanged at 8.23 per cent, the highest in a year.
 
While food prices rose the most this year, Reddy said, he was confident that the record output and prospects of increased food output this year along with curbs on farm exports will boost supplies and help tame inflation.

The government also raised its inflation estimate for the week ended March 29 to 7.75 per cent from 7.41 per cent. The hike in fuel prices, announced on June 4, will be reflected in the inflation data due for release on June 20.

The government raised administered prices of petrol by around 11 per cent, diesel by nine per cent and cooking gas by 17 per cent after crude oil reached a record $135.09 a barrel in New York on May 22.

Reddy said the Reserve Bank is also prepared to use its foreign exchange reserves if it helps to tame inflation.

India imports over 70 per cent of its oil requirements.
 
''The RBI, he said, had anticipated the rise in global oil prices and had factored it in its policy. But, we have reached an extraordinary situation and the bank is willing to deploy forex reserves to meet the challenge.''

 The country's forex reserves stood at $316.17 billion on 23 May.

''Overall, some abatement of global prices, indications of better domestic supply in addition to our buffer stocks along with a series of measures taken by the centre to increase supply are expected to yield results,'' Reddy said, adding there was also a need for an increased spread of insurance cover for crops as also newer forms of credit assessment and risk management systems.

Reddy said the outlook for the country's sugar production appeared ``bright'' and that for wheat output was ``positive''.

Food grain production in India is expected to increase to a record 227.3 million tonnes for the year ending June, helped by bumper rice, wheat and lentils output. Farm production may receive an additional boost as rainfall during the current monsoon season is forecast to be adequate.

India, Asia's third-largest economy, grew nine per cent in the year ended 31 March, the weakest pace in three years. RBI expects GDP growth to be between eight per cent and 8.5 per cent.

(Read full text of Dr Reddy's address, Agriculture: Emerging Issues and Possible Approaches, at the 40th convocation address of the Acharya N.G. Ranga Agricultural University, Hyderabad on June 5, 2008)