India May Increase Key Rates in Early 2010, Goldman Sachs Says

June 10 (Bloomberg) -- India’s central bank may start increasing interest rates in early 2010 as inflation accelerates at more than double the expected pace, Goldman Sachs said.

“Policy easing is at an end,” Tushar Poddar, an economist at Goldman Sachs in Mumbai, said in a report yesterday. “The first rate hikes may come in early 2010 as monetary policy moves from being very loose to a more neutral stance.”

Goldman Sachs joins Barclays Plc in predicting that the Reserve Bank of India, which has cut rates to record lows amid the global recession, may soon change its stance and begin raising borrowing costs to ward off inflation. Central bank Governor Duvvuri Subbarao said last month that it might be time to start thinking about reversing “expansionary” policies.

Subbarao has slashed India’s policy repurchase rate by 425 basis points since October and lowered the reverse repurchase rate by 275 basis points. The reductions, combined with three government stimulus packages, are worth about 7 percent of gross domestic product, according to central bank estimates.

“Policy remains very loose,” Poddar said. “Additional cuts would be a mistake as it would affect demand when it is already rising and risk stoking inflationary pressures.”

Signs of a recovery in Asia’s third-largest economy are already emerging.

The $433 billion economy expanded 5.8 percent in the three months to March 31 from a year earlier, matching the growth pace of the previous quarter and beating the 5 percent median forecast of economists surveyed by Bloomberg News.

‘Stronger Recovery’

Growth can rebound to a 9 percent pace as higher government spending counters the impact of the worst worldwide economic slump since the Great Depression, Prime Minister Manmohan Singh told parliament in New Delhi yesterday. Finance Minister Pranab Mukherjee is due to unveil the government’s budget in early July.

“The initial conditions for a domestic demand-led recovery are now in place,” Sonal Varma, an economist at Nomura Securities Co. in Mumbai, said in a report yesterday. “The economy should see a stronger recovery from the fourth quarter of 2009 onwards.”

An index of composite leading indicators for the Indian economy compiled by the Organisation for Economic Cooperation and Development rose 0.4 point in April from the previous month, the first increase in 16 months.

“Tentative signs of a trough” have emerged in the Indian economy, the Paris-based OECD said in a June 8 report.

Rising domestic demand will exert upward pressure on prices, Poddar said. He expects Indian inflation to reach 6.5 percent in the year ending March 31, 2010, compared with a previous forecast of 3 percent.

Price Pressures

India’s benchmark wholesale price index rose 0.48 percent in the week to May 23 from a year earlier, holding below 1 percent for the 12th straight week.

Other price measures have not been so benign. Consumer prices paid by industrial workers rose 8.03 percent in March from a year earlier, after gaining 9.63 percent in February.

India has four consumer price indices and uses the wholesale price index as the benchmark as the other gauges don’t capture the aggregate price picture.

Higher oil prices will also add to inflationary pressures in India, Poddar said, adding that Goldman Sachs’ commodity research team has increased its forecast for crude to $85 a barrel at year-end 2009 from a previous prediction of $65. The price target for the end of 2010 is $95 a barrel.

“India is particularly vulnerable to oil prices as it imports a majority of its oil needs,” Poddar said. A 10 percent increase in the nation’s administered price of crude oil would add 0.6 percent to the benchmark wholesale price inflation index, he said.