BRIC Outlier India May Raise Rates Further as Prices Trump Europe Threat By Kartik Goyal - Sep 16, 2011

India’s central bank may extend its record interest-rate increases, economists predicted after Governor Duvvuri Subbarao said a “premature” change in the monetary policy stance may fan inflationary expectations.

The Reserve Bank of India may increase its repurchase rate to 8.5 percent from 8.25 percent by the end of December, according to 11 of 16 economists in a Bloomberg News survey after the monetary authority raised the benchmark by a quarter of a percentage point yesterday. The rest expect no change.

India stands apart among BRIC nations including Brazil Russia and China, which have either eased borrowing costs or kept them on hold, to protect their economies from faltering recoveries in Europe and the U.S. Higher fuel prices and Asia’s worst-performing currency this quarter may fan inflation, that has exceeded 9 percent in each of the past nine months.

“The RBI’s guidance was very explicit, that it rightly intends to pursue its anti-inflationary stance till inflation begins to moderate toward a more acceptable level,” said Sajjid Chinoy, a Mumbai-based economist at JPMorgan Chase & Co. “With input price pressures still strong and inflation unlikely to come off substantially in the coming months, we expect another rate hike.”

Chinoy expects the central bank to boost rates by a quarter point in the Oct. 25 policy meeting.

The yield on the 7.8 percent bond due April 2021 rose four basis points, or 0.04 percentage point, to 8.36 percent, a six- week high, at the close of trading in Mumbai yesterday. The Bombay Stock Exchange Sensitive Index gained 0.3 percent and the rupee advanced 0.6 percent to 47.265 per dollar.
Weaker Rupee

The Indian rupee has declined 5.4 percent this quarter as investors shunned emerging markets on concern the world economy is weakening.

Inflation in India is the highest among the BRICS nations, quickening to a 13-month high of 9.78 percent in August.

Consumer prices rose 7.2 percent in Brazil, 8.2 percent in Russia and 6.2 percent in China last month from a year earlier. In South Africa, they climbed 5.3 percent in July.

“Inflation remains high, generalised and much above the comfort zone of the Reserve Bank,” the central bank said in the statement. “A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is therefore imperative to persist with the current anti-inflationary stance.”

Subbarao has raised borrowing costs by a total of 350 basis points since mid-March 2010, the fastest round of increases since the Reserve Bank was established in 1935, Bloomberg data show.
‘More Comfortable’

“The measures taken would get us back to a more comfortable inflation situation earlier rather than later, while leaving scope for growth to pick-up in the second half of the year,” Finance Minister Pranab Mukherjee said in an e-mailed statement yesterday.

India needs to control inflation to protect purchasing power and sustain growth, the Reserve Bank has said.

The $1.7 trillion economy expanded 7.7 percent in the three months ended June 30 from a year earlier, the slowest pace since the last quarter of 2009. Gross domestic product rose 7.8 percent in the previous three months.

India’s central bank said that even as many indicators point to moderating growth, “in the current scenario, with the likelihood of inflation remaining high for the next few months, rising inflationary expectations remain a key risk.”
Gasoline Cost

Inflation may accelerate after Indian Oil Corp., the country’s biggest refiner, raised gasoline prices yesterday for the second time in four months. Losses from selling fuels below cost are increasing following the rupee’s decline against the dollar, Indian Oil Finance Director P.K. Goyal said Sept. 15.

The increase in gasoline prices will have a “direct impact of 7 basis points” on inflation, in addition to an “indirect impact with a lag,” according to yesterday’s statement.

“Input price pressures are not going away, particularly given the weaker rupee,” said Devika Mehndiratta, a Singapore- based economist at Credit Suisse Group AG. “This along with food prices that are going up at a decent clip may keep inflation elevated at more than 9 percent in the next few months.”

Officials from China to South Korea have refrained from raising rates in recent weeks to gauge whether slowing economic growth will dissipate price pressures. In Brazil, the central bank opted to cut its target Selic rate on Aug. 31 for the first time since 2009 to protect expansion.
Russia’s Stance

Policy makers in Russia, which doesn’t target one rate, reduced the rate charged on repurchase loans and raised the deposit rate on Sept. 14 to bolster the amount of cash in the market and spur growth.

Prime Minister Manmohan Singh last month said curbing inflation is his government’s priority. The opposition has criticized him for failing to control price gains in a country where the World Bank estimates more than three-quarters of the population live on less than $2 a day.

“As monetary policy operates with a lag, the cumulative impact of policy actions should now be increasingly felt in further moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12,” the central bank statement said.

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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