India Central Bank Signals Higher Rates on Growing Price Risks

India’s inflation risks have “amplified” because of higher commodity prices and “policy interventions” are needed, the central bank said, signaling the possibility of increasing borrowing costs today.

“Persistence of inflation warrants continuation of anti- inflationary monetary policy stance for sustaining growth,” the Reserve Bank of India said in a report yesterday. The rate decision is scheduled to be unveiled at 11 a.m. in Mumbai.

Governor Duvvuri Subbarao may boost the central bank’s benchmark repurchase rate to 7 percent from 6.75 percent, according to 18 of 25 economists in a Bloomberg News survey. The remaining seven including HSBC Group Plc predict a half percentage-point move to contain India’s inflation, which is the highest among the so-called BRICS nations after Russia.

“The hawkish comments indicate more monetary tightening today is a given,” said Shubhada Rao, chief economist at Yes Bank Ltd. in Mumbai, and who expects a quarter-point increase. “Inflation will remain elevated in the near future.”

The Bombay Stock Exchange’s Sensitive Index declined 0.7 percent at the close of trading in Mumbai yesterday, while the yield on the 7.8 percent bond due April 2021 gained one basis point to 8.14 percent. The rupee fell 0.3 percent to 44.33 per dollar.

India’s benchmark wholesale-price inflation quickened to 8.98 percent in March, more than the central bank’s 8 percent estimate, prompting Goldman Sachs Group Inc. (GS), Standard Chartered Plc and Barclays Plc to raise their forecast for rate increases this year.
BRICS Inflation

By comparison, consumer prices rose 5.4 percent in March, 9.5 percent in Russia, 6.3 percent in Brazil and 4.1 percent in South Africa.

Goldman Sachs April 21 estimated India’s central bank will probably increase rates by another 1.25 percentage points in 2011, more than the half-point increase predicted earlier. Standard Chartered forecast on April 18 the repurchase rate will rise by 1 percentage point in six months, while Barclays predicted a 75-basis point increase, compared with original calls of 50 basis points.

Inflation may average 7.5 percent in the year ending March 31, according to a survey compiled by the central bank of forecasts from agencies including the International Monetary Fund and the Asian Development Bank, yesterday’s report showed. The survey in January projected inflation of 6.6 percent.

India’s economy may expand 8.2 percent in the current financial year, the survey said, scaling down its previous estimate of 8.5 percent.
Growth Risks

“Given the risk that high and persistent inflation in itself could jeopardize the growth momentum and inclusive growth, the policy has to focus on anchoring inflationary expectations as well as limiting the second-round impact of supply shocks,” according to the report.

Risks to inflation have increased because of the “uncertain outlook” on global commodity prices and as local costs haven’t aligned to those prevailing abroad, central bank said.

Prime Minister Manmohan Singh, facing state elections in five provinces, has sought to appease voters with price caps on diesel, kerosene and cooking gas after inflation triggered nationwide protests earlier this year.

Goldman Sachs said in a report April 27 that the government may start allowing Indian Oil Corp. and others to charge more for the fuels once elections in the four states and one union territory conclude on May 10.
Fuel Prices

Indian Oil hasn’t increased diesel prices since June 26 and gasoline since Jan. 16, according to the company’s website.

Oil has climbed 31 percent in London and 23 percent in New York this year as revolts that overthrew the governments in Tunisia and Egypt raised concern that supplies from the Middle East would be disrupted as protests spread.

A report yesterday showed that India’s manufacturing grew in April at the fastest pace in five months, a sign that consumer demand remains strong even after Subbarao raised borrowing costs by 200 basis points since mid-March 2010.

The Purchasing Managers’ Index rose to 58 from 57.9 in March, HSBC Holdings Plc (HSBA) and Markit Economics said in the report. A number above 50 indicates expansion.