India’s Central Bank Signals ‘Cautious’ Pace of Rate Increases

May 20 (Bloomberg) -- India’s central bank signaled it may raise interest rates in a measured manner as Europe’s debt crisis outweighs inflation concerns.

Global economic conditions have changed in the past six weeks and a “cautious pace is the best way to go and that is the stance,” Subir Gokarn, the deputy governor in charge of monetary policy at the Reserve Bank of India, told reporters in Thiruvananthapuram, India, yesterday. “I am aware rates are quite out of line with inflation and the growth scenario.”

India and China, the world’s fastest-growing major economies, are struggling to control inflation amid risks to growth emanating from debt woes of Greece, Portugal and Spain. Gokarn’s comments indicate the central bank may slow the pace of interest-rate increases even though Governor Duvvuri Subbarao described rising prices as a “big worry.”

“Interest rates will go up, but in a gradual way,” said Dharmakirti Joshi, chief economist at Crisil Ltd., the Indian unit of Standard & Poor’s. Subbarao may raise borrowing costs by a quarter percentage point in the next monetary policy announcement on July 27, Joshi said, adding a move before that is unlikely.

The Reserve Bank on April 20 raised its benchmark interest rates by a quarter point for the second time in a month, increasing the reverse repurchase rate to 3.75 percent and the repurchase rate to 5.25 percent.

Protect Economy

The government will protect the Indian economy from the crisis in Europe, Finance Minister Pranab Mukherjee said in an interview with the NDTV Profit television channel yesterday.

India’s central bank unveiled its stance after the European Union and International Monetary Fund cobbled together a 110 billion-euro ($136.4 billion) rescue package for Greece on May 2 to prevent contagion. European leaders followed it up with an unprecedented emergency fund of as much as 750 billion euros to back countries facing instability and a program of bond purchases by the European Central Bank.

Europe’s problems coincide with rising prices in India, with the benchmark wholesale-price inflation rate climbing 9.59 percent in April as demand for cars and houses increase.

India’s industrial production grew 13.5 percent in March, rising more than 10 percent for a sixth straight month.

In China, where industrial production rose 17.8 percent in April, consumer prices climbed at the fastest pace in 18 months, adding pressure on policy makers to raise interest rates and allow yuan gains. China has raised banks’ reserve requirements three times this year.

Factory Output

Factory output is gaining strength in India as wages rise. Salaries in India may grow at the fastest pace in the Asia Pacific this year, according to Hewitt Associates Inc., the Lincolnshire, Illinois-based human resources adviser.

Cement production by companies including ACC Ltd., India’s biggest cement maker, gained 10.1 percent in March, the government said on April 27.

Concerns about Europe caused the Sensitive Index to fall the most in about four months yesterday, declining 2.8 percent on the Bombay Stock Exchange. The rupee weakened the most in 15 months, closing at 46.3550 per dollar in Mumbai, while the yield on the 10-year government bond fell five basis points to 7.44 percent, the lowest in more than five months.

Subbarao and Gokarn are in Thiruvananthapuram for a meeting of the central bank’s board of directors today. The board includes Azim Premji, chairman of Wipro Ltd., India’s third- largest software provider, and Kumar Mangalam Birla, chairman of Hindalco Industries Ltd., the nation’s largest aluminum producer.