India’s central bank Governor Duvvuri Subbarao said he expects to bring inflation “firmly” under control in the next one or two years, giving scope to shift the focus of monetary policy to spur economic growth.
“I would hope that in the next one or two years inflation is firmly under control, both from the supply and demand sides, and we are able to run the monetary policy biased more towards growth,” Subbarao said in an interview with Bloomberg-UTV in Mumbai today, a day after raising interest rates for the sixth time in 2010, the most in Asia this year.
For the next three months, the central bank may not raise borrowing costs, Subbarao said yesterday, as nations from Japan to the U.S. consider additional stimulus to support growth. The governor is concerned global liquidity and interest-rate differentials with advanced nations may lead to an “intensification” of capital flows into India, boosting liquidity and exacerbating inflation.
“Inflation will remain an issue in India because of structural problems in agriculture and industry,” said Saugata Bhattacharya, an economist at Axis Bank Ltd. in Mumbai. “The RBI is juggling multiple objectives, and at this point in time, it is probably concerned more about capital inflows.”
India’s benchmark wholesale-price inflation slowed to 8.6 percent in September from a 20-month high of 11 percent in April. Finance Minister Pranab Mukherjee said Oct. 26 the pace of price gains is still double the “ideal” level, hurting purchasing power. The World Bank estimates about 75 percent of Indians live on less than $2 a day.
Inflation Forecast
Subbarao on Nov. 2 forecast inflation to slow to 5.5 percent by March 31 as he boosted the repurchase rate by a quarter-point to 6.25 percent and the reverse repurchase rate by a similar margin to 5.25 percent. He said the Reserve Bank of India’s medium term inflation target is between 4 percent and 4.5 percent.
“Demand pressures are persistent and there are structural factors in food inflation and they will take time to resolve,” Subbarao said in the interview. “So, on the inflation front, even though, it’s moderating, there are persistent concerns.”
Food inflation has remained above 10 percent since June 2009 as the government increased prices it pays farmers for grains, according to the Planning Commission, which sets growth and investment targets in India.
Farm Prices
The government’s minimum support price, or the remuneration it guarantees farmers for their crop, has almost doubled in the past six years for rice, maize and wheat, according to farm ministry data.
Constraints in ports and power also increase the cost of doing business in India, increasing price pressures. The average turnaround time for ships to unload and load cargo at major ports in India is almost four days compared with 10 hours in Hong Kong, India’s finance ministry estimates.
Economists at JPMorgan Chase & Co. and DBS Group Holdings Ltd. expect the Reserve Bank to resume monetary policy tightening in the first quarter of 2011. The central bank’s next rate decisions are scheduled for Dec. 16 and Jan. 25.
India’s 12-year bonds gained today for a sixth day after Subbarao said that immediate action on rates is unlikely unless there are unforeseen events. The yield fell one basis point, or 0.01 percentage point, to 8 percent as of the 5 p.m. close in Mumbai.
The Bombay Stock Exchange’s Sensitive Index gained 0.6 percent to 20,465.74 led by lenders including State Bank of India and HDFC Ltd. The rupee strengthened 0.1 percent to 44.35 per dollar as of the 5 p.m. close in Mumbai and reached 44.2350, the strongest level since Oct. 20.
Policy Stance
India is pausing rate increases amid the greatest concentration of monetary-policy action by leading central banks since the first week of October 2008, when they met in emergency sessions to fight the global financial crisis.
The U.S. Federal Reserve started a two-day meeting yesterday to consider pumping additional stimulus into the world’s largest economy. The Fed may today announce a plan to buy at least $500 billion of long-term securities, according to economists surveyed by Bloomberg News.
The Bank of Japan cut rates on Oct. 5 and brought forward the date of its next policy meeting to Nov. 4 and 5 to discuss purchases of exchange-traded funds and real-estate investment trusts.
“We are watching it very closely,” Subbarao said. “If the quantitative easing is beyond what’s expected, beats expectation on either side, then there could be more flows or some outflows, depending on how it’s designed.”
Since Subbarao’s first rate increase on March 19, the spread between India’s debt due in a decade and 10-year Treasuries widened 121 basis points, or 1.21 percentage points, to 541 today. The gap, which has averaged 317 in the past decade, reached a 10-year high of 567 basis points on Oct. 20.
Higher yields spurred an unprecedented $10 billion inflow into rupee debt this year. Overseas funds also poured a record $25 billion into Indian stocks on prospects of faster growth in the South Asian nation, strengthening the currency and driving the Sensitive Index, or Sensex, to near a record.
Since Jan. 1, the rupee has risen 4.9 percent against the dollar while the Sensex has jumped 17 percent.
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