India Faces Pressure to Step Up Inflation Fight After Eighth Rate Increase

By Kartik Goyal and Unni Krishnan - Mar 18, 2011

India faces pressure to step up its battle against price gains even after the steepest interest-rate increases among Asia’s major economies, as oil costs rise and consumer demand strengthens.

The Reserve Bank of India yesterday raised its inflation forecast for the second time since late January as it lifted the benchmark repurchase rate by a quarter-point to 6.75 percent, the eighth move in a year.

“The pressures to manage inflation, out of the evolving domestic and global situations, have only intensified,” Shanto Ghosh, an economist at Deloitte Touche Tohmatsu India Pvt., said in an interview from New Delhi yesterday. “The pace of further monetary tightening may see some acceleration.”

Governor Duvvuri Subbarao may boost borrowing costs by another 0.75 percentage point in 2011, HSBC Holdings Plc and DBS Group Holdings Ltd. said. India imports three-quarters of its energy needs and oil has surged 25 percent in the past 12 months, stoked by political turmoil in the Middle East and Libya that threatens supplies.

“The RBI would now appear even more concerned about the inflation outlook,” said Leif Eskesen, an economist at HSBC in Singapore. “Inflation risks clearly remain the dominant concern, especially considering the current cocktail of elevated food prices, rising international commodity prices and demand- led inflation pressures.”
Stocks Fall

The Bombay Stock Exchange’s Sensitive Index fell 0.7 percent at 10 a.m. in Mumbai, extending declines this year to 12.1 percent, the most in Asia. India’s 11-year bond yields climbed four basis points to 8.12 percent, while the rupee strengthened 0.2 percent to 45.08 per dollar.

Subbarao’s eight rate increases in the past year compare with three in China and four in South Korea. Indonesia lifted its reference rate last month for the first time this year after opting not to join counterparts in boosting rates in 2010.

India’s key wholesale-price inflation unexpectedly quickened to 8.31 percent in February, led by manufactured product costs. That prompted the Reserve Bank yesterday to predict the price gauge will reach 8 percent at the end of March, compared with 7 percent it estimated on Jan. 25.

“Risks to inflation remain clearly on the upside, reinforced by the persistence of demand-side pressures as reflected in non-food manufacturing,” the Reserve Bank said in its statement yesterday.
Consumer Demand

The central bank said non-food manufacturing inflation, which reflects the strength in consumer demand, accelerated to 6.1 percent in February from 4.8 percent in the previous month.

“The acceleration was spread across manufacturing activities, indicating that producers are able to pass on higher input prices to consumers,” the bank said.

General Motors Co.’s India unit, which had raised prices by as much as 2 percent in January, may boost them again by the end of this month, Karl Slym, head of the Detroit-based company’s local unit, said in an interview with Bloomberg News on March 4.

Videocon Industries Ltd., an Aurangabad, India-based maker of television sets, refrigerators and washing machines, will probably pass on the “relentless surge” in raw material costs to customers, Suresh M. Hegde, head of finance at the company, said in a March 15 interview.

India’s $1.3 trillion economy may expand by as much as 9.25 percent in the fiscal year starting April 1, the fastest pace since 2008, the finance ministry forecast last month.
Tax Cuts

Demand may strengthen after Finance Minister Pranab Mukherjee’s budget for the fiscal year starting April 1 proposed increasing spending by 13.4 percent to 12.6 trillion rupees ($279 billion). It also includes plans to exempt incomes below 180,000 rupees from tax, higher than the previous threshold of 160,000 rupees.

Prime Minister Manmohan Singh’s coalition is aiming to put more money in the hands of voters to help them cope with rising prices and shore up support for five state elections this year.

The central bank said the purchasing managers’ index, higher tax collections and expansion in bank credit provide evidence that India’s growth momentum is intact.

Manufacturing in India grew at the fastest pace in three months in February, according to the purchasing managers’ index released by HSBC and Markit Economics. Loans extended by lenders including ICICI Bank Ltd. gained 23.21 percent in the two weeks to Feb. 25, near the fastest pace in more than two years.

Even as inflationary pressures have “accentuated”, risks to growth are emerging, the Reserve Bank said.
Oil Concerns

“Rising global commodity prices, particularly oil, are a major contributor to both developments,” it said. “Continuing uncertainty about energy and commodity prices may vitiate the investment climate, posing a threat to the current growth trajectory.”

Oil surged in New York after the United Nations Security Council voted to ground Libyan leader Muammar Qaddafi’s air force as continuing unrest in the Middle East and North Africa renewed concerns the turmoil may spread and disrupt supply.

Regional unrest, which has cut Libya’s crude production by 1 million barrels a day and toppled the leaders of Tunisia and Egypt, has reached Saudi Arabia’s neighbors Yemen and Oman as well as Bahrain.

Crude for April delivery gained as much as $2.24 to $103.66 a barrel in electronic trading on the New York Mercantile Exchange. Prices are up 1.7 percent for the week.

“Crude prices have a deep and insidious impact on the Indian economy via chemicals, petrochemicals and transport costs,” said Saugata Bhattacharya, a Mumbai-based economist at Axis Bank Ltd. “They pressurize the economy, be it on prices or eventually on growth.”

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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