Mumbai: Balancing the trade-off between supporting growth and keeping a lid on inflation poses a complex policy challenge, the Reserve Bank of India (RBI) said on Monday, a day before it is widely expected to hold interest rates steady.

“While premature reversal of the monetary policy stance entails the risk of stifling recovery, persistence of accommodative stance could adversely impact inflation," the RBI said in its review of the second quarter for 2009-10 (April-March).

The central bank said anchoring inflation expectations in the face of sustained high inflation in key commodities would be a challenge, and cautioned that sluggish private consumption and investment demand were a drag on faster recovery.

Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai, said Tuesday’s quarterly monetary policy statement would probably highlight the risk of inflation but err on the side of preserving growth momentum.

“What the RBI is trying to indicate in the report is that aggregate demand conditions continue to stay weak. On the other hand, RBI clearly points to emerging signs of inflationary pressures," he said

Many economists expect the central bank to begin tightening interest rates in early 2010.

The central bank said its September survey of professional forecasters produced a median forecast of 6.0% growth for 2009-10, down from an earlier forecast of 6.5% on concerns about the impact of the weakest monsoon in almost 40 years.

While the deficient June-September rains could hinder a faster recovery, the RBI said the delayed withdrawal of the monsoon augured well for winter wheat and oilseeds crops due to high moisture retention in the soil.

Government officials have said growth could be around 6.5% or higher this fiscal year.

Last year, country’s economy grew at 6.7% after three years of growing by at least 9%.

Headline inflation rose at a faster-than-expected pace in the year through mid-October to its highest level in 20 weeks, but government officials and analysts expect the central bank to maintain its focus on stimulating growth and leave rates unchanged at its policy review on Tuesday.

Policymakers including Prime Minister Manmohan Singh have pressed the case for keeping easy fiscal and monetary policy in place to nurture growth in Asia’s third-largest economy.