India’s inflation must ease before the central bank can reduce interest rates, Governor Duvvuri Subbarao said, signaling policy makers may maintain a tight monetary stance for now.
“We are deeply sensitive in making India a low interest- rate regime but that will take time,” Subbarao said in the northern Indian city of Jaipur yesterday. “First, we need to bring inflation down in order to bring interest rates down.”
Emerging-market nations from Brazil to South Korea have turned from fighting price gains to supporting growth as a struggling U.S. recovery and deepening debt crisis in Europe threaten the global economy. In India, the fastest inflation in more than a year is sustaining pressure for higher borrowing costs even as consumer demand wanes.
“Even though there are signs of demand weakening, India’s central bank can’t afford to lower its guard as yet because inflation is at a high level,” said Arun Singh, Mumbai-based senior economist at Dun & Bradstreet Information Services India Pvt. He expects the Reserve Bank of India to raise its repurchase rate by a quarter of a percentage point to 8.5 percent in the Oct. 25 policy meeting.
“Whether we will be pausing the hikes or whether we will be continuing with hiking, it’s not clear,” Subbarao said, adding that he would “consult experts and discuss internally” and announce the decision in this month’s policy review.
India’s 10-year bonds fell at the close in Mumbai yesterday, pushing yields up by 0.03 percentage point to 8.74 percent, near a three-year high, as a government report this week may show inflation held close to a 13-month peak in September.
Weak Currency
The Bombay Stock Exchange Sensitive Index climbed 2.6 percent, and the rupee strengthened 0.8 percent to 48.96 per dollar yesterday. The currency has weakened 8.7 percent this year, the worst performer in Asia, boosting import costs.
“Money is moving out of emerging markets and India and that is putting pressure on the rupee,” Reserve Bank Deputy Governor Subir Gokarn said in Jaipur yesterday, before the central bank’s board meeting today. He said oil and food costs are stoking inflationary pressures in India.
India’s benchmark wholesale-price inflation rate was probably 9.75 percent in September, the median of 20 estimates in a Bloomberg News survey showed. The commerce ministry will release the data on Oct. 14.
Inflation is a political issue in India as it erodes spending power in a nation where the World Bank estimates more than three-quarters of the population live on less than $2 a day.
‘Calibrating’ Rates
“In calibrating interest rates, the RBI takes into account the need of the industry, which wants interest rates low as well as the need of the poor, who want low inflation,” Subbarao said. “We have had to raise rates to combat inflation.”
In his most recent policy decision on Sept. 16, Subbarao raised the central bank’s repurchase rate by a quarter point to 8.25 percent. He said on Sept. 26 that inflation will slow by March 2012, “but more slowly than initially expected.”
The governor in July predicted inflation to ease to 7 percent by March 31. He forecast India’s economy to expand about 8 percent in the year through March from 8.5 percent in the previous year.
Subbarao has boosted the Reserve Bank’s benchmark rate by 350 basis points since mid-March 2010, the fastest round of increases since the central bank was established in 1935, Bloomberg data show.
Consumer Demand
That’s curbing consumer demand. Sales at companies including Maruti Suzuki India Ltd. (MSIL), the nation’s biggest carmaker, fell 1.8 percent in September, the third straight monthly decline, the Society of Indian Automobile Manufacturers said Oct. 10.
India’s industrial production rose less than expected in August, the Central Statistical Office said yesterday. Output at factories, utilities and mines increased 4.1 percent from a year earlier, slower than the 4.7 percent median of 20 estimates in a Bloomberg News survey.
“Bringing inflation under control, that remains and sustains at some comfortable level over a period of time, is the primary objective of our policy,” Gokarn said. “It may cause some disruptions. Moderation of growth is the price we pay but the alternate could be much worse.”
To contact the reporters on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net; 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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