Indian Central Bank Says Curbing Inflation `Dominant' Objective

India’s central bank said reducing inflation is the “dominant” goal at the moment, signaling the possibility of an interest-rate increase today.

“The anti-inflationary focus of monetary policy would have to continue,” the Reserve Bank of India said in a report yesterday. “Since a lower inflation regime is essential for sustainable high growth, containing inflation becomes the dominant policy objective in the current environment.”

Governor Duvvuri Subbarao may join South Korea and Thailand in raising borrowing costs this month after boosting them six times in 2010, the most by any central bank in Asia. The move will buttress government efforts to cool inflation after Prime Minister Manmohan Singh unveiled plans to import onions from Pakistan and keep a ban on exports of lentils and edible oils.

“The RBI’s pretty hawkish stance indicates that a rate hike is a done deal,” said Shubhada Rao, a Mumbai-based economist at Yes Bank Ltd. “Inflation is becoming a huge challenge for policy makers.”

Twenty one of 22 economists in a Bloomberg News survey forecast Subbarao will raise the benchmark repurchase rate by a quarter-point to 6.5 percent. One expects a half-point increase. The RBI is due to announce the decision at 11:30 a.m. in Mumbai.

Bonds Fall

India’s benchmark nine-year government bonds fell for a second day on speculation the RBI will tighten policy. The yield rose one basis point to 8.17 percent as of the 5 p.m. close in Mumbai yesterday. A basis point is 0.01 percentage point.

The Bombay Stock Exchange’s Sensitive Index, which has declined 6.6 percent this year, gained 0.8 percent. The rupee slipped 0.1 percent to 45.68 against the dollar.

Subbarao refrained from boosting borrowing costs in the last policy statement on Dec. 16 as a record 1.1 trillion rupees ($24.1 billion) of share sales by companies including Coal India Ltd. caused a cash squeeze at lenders.

Inflation in India is being stoked by the higher cost of farm products. The food-inflation rate rose to 15.5 percent in the week to Jan. 8 in Asia’s third-largest economy, undermining spending power in a country where the World Bank estimates 828 million people live on less than $2 a day.

The benchmark wholesale-price inflation rate may average 8.5 percent in the year ending March 31, according to a survey of forecasts by lenders and research groups including the International Monetary Fund and the Asian Development Bank compiled by the RBI, yesterday’s report showed. In November, the average inflation was projected at 8.1 percent.

Faster Growth

The survey showed the economy may grow 8.7 percent in the year through March, faster than the 8.5 percent estimated three months ago.

“While inflation upsurge has largely come from supply-side elements, monetary policy would need to factor in near-term risks to inflation from high input cost pressures transmitting to output prices,” the central bank said in the report. “The risks to generalized inflation cannot be overlooked as inflation expectations are currently ruling high.”

Companies including Hindustan Unilever Ltd., India’s biggest household products maker, may suffer lower profit in the three quarters through September as input prices rise, Amit Mishra, a Mumbai-based analyst at Macquarie Securities India Pvt., said in an interview on Jan. 7.

Asian Rates

Officials across Asia have tightened monetary policy in recent weeks.

The Bank of Korea on Jan. 13 raised borrowing costs for the third time since the global financial crisis while Thailand on Jan. 12 increased its benchmark rate for the fourth time in seven months.

China, which boosted rates twice in the fourth quarter of last year, told banks on Jan. 14 to set aside more deposits as reserves for the fourth time in just over two months.

India’s main opposition Bharatiya Janata Party started a month-long campaign on Jan. 20 against Singh’s government, alleging corruption and a failure to check price gains.

Singh, who wants to cap prices before his Congress party faces nine state elections in the next 18 months, said Jan. 19 he’s “confident” of slowing inflation by March.

Chakravarthy Rangarajan, the top economic adviser to Singh, said Jan. 7 that “some action” by the RBI may be needed to contain prices.