Subbarao Says India’s Current Inflation Is ‘Far Above the Threshold Level’

By Anoop Agrawal and Kartik Goyal - Aug 5, 2011

India’s inflation rate is “far above the threshold level” and policy makers need to slow economic growth to curb price gains, central bank Governor Duvvuri Subbarao said.

“In the short term you may have to sacrifice growth to generate an environment of rapid growth and steady inflation in the medium term,” Subbarao said in Mumbai yesterday. “Some data show that 5 percent inflation is the threshold level, so at 9.4 percent we are far above the threshold level.”

India’s stance contrasts with Europe, Japan and Switzerland, which are either adding cash into their economies or seeking to stem appreciating exchange rates to support expansion. Price gains in India are the highest among the BRICS nations that include Brazil, Russia, China and South Africa.

“The Reserve Bank of India has to hike rates further given the inflation situation,” said Suvodeep Rakshit, an economist at Kotak Securities Ltd. in Mumbai. “Considering the rate increases so far and the growing global uncertainties, it would be hard to continue tightening aggressively though.”

Rakshit expects India’s central bank to increase borrowing costs by half a percentage point by the end of December.

India’s 10-year bonds rose, driving yields down this week by the most since June, as investors sought the relative safety of government debt on increasing signs the global recovery is faltering.
Yields Fall

The yield on the 7.8 percent bonds due April 2021 declined 13 basis points this week, or 0.13 percentage point, to 8.33 percent as of 9:52 a.m. in Mumbai, according to the central bank’s trading system. The rate was the lowest since July 25. The yield fell 8 basis points today.

Asian stocks fell the most since March, extending a global rout, and the region’s bonds gained, while commodities dropped for an eighth day amid concern of slowing global economic growth.

The MSCI Asia Pacific Index tumbled 3.8 percent at 12:41 p.m. in Tokyo, set for its largest weekly decline since October 2008. The Bombay Stock Exchange Sensitive Index declined 2.4 percent, the lowest level in almost 14 months and the rupee weakened 0.5 percent to 44.76 against the dollar today.

The Reserve Bank of India has raised its repurchase rate 11 times since the start of 2010 and last increased it by 50 basis points on July 26 to 8 percent to damp rising living costs.

India’s benchmark wholesale-price inflation accelerated to 9.44 percent in June. By comparison, consumer prices rose 6.7 percent in Brazil, 9.4 percent in Russia, 6.4 percent in China and 5 percent in South Africa.
Growth Outlook

Indian policy makers need to worry about the economic cost only if the expansion dips below 8 percent, Montek Singh Ahluwalia, the deputy chairman of India’s Planning Commission, said in a July 19 interview in New Delhi.

The central bank last week maintained its growth forecast of 8 percent for the current fiscal year ending March 31, even after citing dangers from Europe’s debt crisis to the outlook for exports. The economy expanded 8.5 percent the previous year.

European Central Bank President Jean-Claude Trichet yesterday said the ECB has resumed bond purchases and will offer banks more cash to stop the region’s debt crisis from engulfing Italy and Spain and hurting the economy. The ECB kept its benchmark rate at 1.5 percent. European officials are trying to put a firewall around Italy and Spain on concern they will have to follow Greece, Ireland and Portugal in seeking bailouts.

Japan yesterday followed Switzerland in seeking to stem appreciating exchange rates that threatened to damage export competitiveness, selling the yen and pledging to inject 10 trillion yen ($126 billion) in funds into the economy.
Deepening Concern

The moves also reflect deepening concern of a U.S. return to recession that might force the Federal Reserve into another round of asset purchases. U.S. gross domestic product expanded at an annual rate of 1.3 percent last quarter, from a near-stall of 0.4 percent in January to March.

Switzerland Aug. 3 unexpectedly cut interest rates and pledged to boost the supply of the franc in money markets to stem a surge in the “massively overvalued” currency.

In India, the government’s priority is to reduce inflation to “an acceptable level” of 5 percent to 6 percent because the poor are the “hardest hit” by higher living costs, Planning Commission’s Ahluwalia said last month.

India’s parliament has been debating rising prices this week and the opposition stepped up their offensive against Prime Minister Manmohan Singh’s coalition for failing to control inflation, which erodes spending power in a nation where the World Bank estimates more than three-quarters of the people live on less than $2 a day.

Meanwhile, India’s central bank yesterday reconstituted its Technical Advisory Committee on Monetary Policy by adding Rakesh Mohan, a former deputy governor at the Reserve Bank and currently a professor at Yale University, and Ashima Goyal, a professor at the Mumbai-based Indira Gandhi Institute of Development Research, according to a statement.

The committee, which meets at least once a quarter, has been expanded to strengthen the “consultative process in monetary policy,” the statement showed.

To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net Anoop Agrawal in Mumbai at aagrawal@bloomberg.net

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