Headline wholesale price index (WPI) inflation hit an eight-month high of 7.0 percent in October, driven by costlier fuel and manufactured goods, data on Thursday showed, raising the prospect of a further rate increase.

Rajan said that demand needs to be reduced without having severe effects on investment and supply.

"This is a balancing act, which requires the Reserve Bank to act firmly so that the economy is disinflating, even while allowing the weak economy more time than one would normally allow for it to reach a comfortable level of inflation," he said in a speech at a banking conference.

At its last meeting, on October 29, the RBI raised its policy repo rate by 25 basis points to 7.75 percent, citing persistent inflationary pressures, despite an economy that grew at a decade-low 5 percent in the fiscal year that ended in March.

"The weak state of the economy, as well as the good Kharif (summer) and Rabi (winter) harvest, will generate disinflationary forces that will help, and we await data to see how these forces are playing out," Rajan said.

"No single data point or number will determine our next move," he said. Indian markets were closed on Friday for a holiday.

(Agencies)

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