While it is not unusual for the two officials to discuss the economy, analysts said the meeting could be a prelude to an earlier-than-expected interest rate rise.
A meeting of India's central bank governor Duvvuri Subbarao with finance minister Pranab Mukherjee fuelled speculation on Friday that the bank may tighten monetary policy earlier than expected to stem rising prices.
The Congress-led government is under pressure to tackle spiralling food prices, an issue which can carry a high political cost in a country with millions on marginal incomes, and which has sparked protests and walkouts in parliament.
"I have come for a routine meeting with the finance minister," Subbarao said. "Of course, when I meet the finance minister I discuss about the macroeconomic situation." He did not elaborate when asked whether rising food prices would lead to a policy change.
While it is not unusual for the two officials to discuss the economy, analysts said the meeting could be a prelude to an earlier-than-expected interest rate rise.
"Headline inflation numbers have indeed caused an agitation in political circles as well, and it is not surprising that monetary authorities and the finance ministry would meet to discuss the issue on a more urgent basis," said Atsi Sheth, chief economist at Macro-Sutra in Mumbai.
"I think the stage is slowly being set for a tightening in the next few weeks rather than at the end of January." News of the meeting pushed up the yield on the 10-year benchmark bond , ending at 7.72 percent after rising as high as 7.74 pct, a level last seen in October 2008.
The yield, which ended at 7.64 percent on Thursday, has risen 51 basis points since late November, when data showing the economy grew an annual 7.9 percent in the September quarter, its fastest in 18 months, boosted the market's view of a tightening.
Data on Thursday showed that food prices surged an annual 20 percent in early December as this year's poor monsoon hit crops.
Inflation spiral
The Reserve Bank of India's next scheduled policy review is at the end of January, but it can change policy settings at any time. Of the six cuts in the repo rate between October 2008 and April, only the last came at a scheduled review.
In a report to parliament on Friday, the finance ministry said pressure on food prices was likely to continue, and food imports could help stem price rises. It also said a surge in capital inflows could lead to an inflationary spiral.
The ministry said strong growth in the September quarter opened up the possibility that the economy could grow more than 7.75 percent, the top of the current forecast range, in the fiscal year to March 2010.
"Government is monitoring (the) price situation on (a) regular basis and containment of inflation is high on its agenda," Mukherjee said in a written reply to a lawmaker's question. Food prices are soaring because of shortages after crops were hit by the weakest monsoon rains in 37 years, followed by flooding in parts of the country.
Subbarao has said that monetary policy is not the right tool to fix supply problems such as food shortages, but has also noted the risk that if soaring food prices were factored into expectations for other prices it would create inflation pressures throughout the economy.
Markets expect the central bank to first raise the cash reserve ratio for banks, or CRR, to drain excess funds from the market, with interest rate rises to follow.
The central bank has said a rate rise risked complicating policy as it could attract more capital flows, which would add to money circulating in the economy and fuel price pressures.
"We are all aware that currently inflation is a supply-side situation, but we are also seeing inflationary expectations go up," said Harihar Krishnamoorthy, treasurer at First Rand Bank in Mumbai. "So rates have to go up, but the question is by how much."
The RBI cut its main lending rate, the repo rate, by 425 basis points between October 2008 and April, slashed the CRR and pumped cash into markets to shore them and the economy up against the global financial crisis and slowdown.
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