* RBI sees mandate as targeting 4 pct inflation - officials
* Markets interpret the target as within 2-6 pct band
* RBI will still be mindful of economic growth - officials
By Suvashree Choudhury
MUMBAI, May 8 (Reuters) - Under governor Urjit Patel, India's central bank will target inflation of 4 percent, three officials familiar with its thinking said, adopting a narrower reading of its mandate than markets in a bid to stamp out rampant price rises of the past.
The differing interpretations of amendments to last year's Reserve Bank of India (RBI) Act reflect sometimes strained relations between the market and the central bank, and are proving a test for Patel some eight months into his tenure.
The amendments were part of landmark changes to India's monetary policy pushed by Patel, then deputy governor, and his predecessor as governor, Raghuram Rajan, and require the RBI "to contain inflation within the specified target level" of 4 percent, but within a tolerated band of 2-6 percent.
Markets have interpreted that as the range of 2-6 percent, arguing that pursuing a specific 4 percent target takes away the flexibility needed in an economy that must grow by at least 8 percent a year to allow for full employment.
But the RBI is determined to chase the 4 percent figure, the officials said, as Patel and the other five members of his monetary policy committee (MPC) seek to defend the RBI's credibility on inflation.
"Markets should read the Act carefully and think as if they are a member of the MPC, and then think: how would they conduct policy?" said one of the officials.
"The Act clearly says 4 percent is the target and the 2-6 percent band has been given only to absorb temporary or one-time shocks."
All three officials spoke on condition of anonymity, because they were not authorised to speak to the press on sensitive policy issues.
The RBI did not give official comment.
Such a stance could open the prospect of earlier interest rate hikes than expected by markets, should prices start to move higher unexpectedly and remain there for some time.
The officials stressed, however, that the RBI was also mindful of growth, in line with an Act that tasks the MPC with "maintaining price stability, while keeping in mind the objective of growth."
Consumer inflation stood at 3.81 percent in March, but weaker-than-expected monsoon rains and planned hikes to government employee salaries could easily see the 4 percent target under threat.
But any move to hike the repo rate of 6.25 percent would need to be balanced by concerns among market participants that the economy is weaker than the 7.0 percent growth in the October-December quarter, as India's move last year to ban higher-valued bank notes continues to reverberate.