Subbarao to Consider Rates as Inflation Slows, Production Gains

Sept. 15 (Bloomberg) -- India’s central bank will tomorrow consider whether to raise interest rates for a fifth time this year as strengthening growth threatens to reverse gains made in reining in inflation.

Governor Duvvuri Subbarao will boost the benchmark repurchase rate by a quarter-point to 6 percent, according to 11 of 16 economists surveyed by Bloomberg News, with five seeing no change. Thirteen expect an increase of that much or more in the reverse repurchase rate by the Reserve Bank of India.

Subbarao is under pressure after millions of workers went on strike over the hit to spending power from inflation, which at 8.5 percent in August remained among the world’s highest even as it eased for a fourth month. A rate move would contrast with pauses by Malaysia and South Korea this month amid concern the global recovery is slowing, and with signals in the interest- rate swaps market of the approach of an end to increases.

“Inflation is a much, much bigger problem in India than in any other country in the region,” said Frederic Neumann, co- head of Asian economic research in Hong Kong at HSBC Holdings Plc. “The RBI should worry about the local factors rather than the global factors over which it has little control.”

Economic reports in the past week indicated both a pick-up in growth and moderation in prices. Industrial production expanded 13.8 percent in July from a year earlier, more than twice the pace in June, a government report showed. Maruti Suzuki India Ltd., the nation’s biggest carmaker, sold a record 104,791 vehicles last month.

Bonds, Rupee

Wholesale prices rose 8.5 percent in August from a year before after July’s 9.8 percent gain, the commerce ministry said in New Delhi yesterday. Benchmark 10-year government bonds rose, sending yields down 2 basis points to 7.94 percent at 4:27 p.m. in Mumbai. The rupee climbed as much as 0.2 percent as a stock rally spurred optimism foreign investors will boost buying.

Prime Minister Manmohan Singh’s government has signaled increased acceptance of higher borrowing costs amid public protests over inflation, which most affects the three quarters of the population who live on less than $2 a day.

At the same time, one gauge of the outlook for rates suggests Subbarao may be approaching the end of the series of increases. The cost of fixing rates on money for three years in the market for so-called interest-rate swaps tumbled 37 basis points in August, the most in 20 months.

Nomura Holdings Inc., Japan’s biggest brokerage, forecasts an increase of 0.25 percentage point this week that will be the last in the year through March.

Government’s Take

The government is consulting the central bank to take “appropriate measures at the appropriate time” to control inflation, Finance Minister Pranab Mukherjee said yesterday in New Delhi. By contrast, he warned on Aug. 4 that growth will suffer if interest rates rise too fast.

Consumer prices paid by industrial and rural workers in India are rising more than 11 percent, faster than the consumer inflation in any other Group of 20 nation.

Worker unions, supported by the opposition communist parties, organized a nationwide strike on Sept. 7 to protest rising prices and state asset sales, prompting millions of workers to stay away from work and forcing banks to shut offices in some cities and airlines to cancel flights.

India’s accelerating economy has lifted incomes and stoked demand for Maruti Suzuki cars, TVS Motor Co. motorbikes and other consumer goods, fuelling inflation. Gross domestic product expanded 8.8 percent last quarter from a year earlier, the most among major economies after China and Brazil.

‘Remain Loose’

“Strong demand and low borrowing costs are adding to inflation,” said N.R. Bhanumurthy, an economist at the New Delhi-based National Institute of Public Finance and Policy. “Monetary policy continues to remain loose given the robust momentum in the economic activity.”

Tomorrow’s meeting is the first of an expanded series of RBI meetings to consider monetary policy. The bank previously met quarterly, and has now increased that to eight times a year.

As India’s role in the global economy rises, the central bank is also examining how it conducts monetary policy. The RBI has used banks’ reserve requirements along with the repo and reverse repo rates to manage liquidity and price pressures in the past year.

The RBI set up a panel this week to review its tools, including the difference between the repo and reverse-repo rates, which are respectively used to inject or remove funds from the system.

Among the central bank’s challenges are price pressures from a lack of investment in electricity and transportation networks. India’s investment in power, ports, roads and other infrastructure was $99 billion in 2009, or 7.5 percent of GDP, while China invested $539 billion, or 10.8 percent of the economy, according to Morgan Stanley.

“The main reason why China can continue to expand at a faster pace without seeing higher inflation is because China invested hugely in creating capacities, while India is still struggling to make a significant progress,” said Bhanumurthy.