Inflation Is `Big Worry' for India's Economy, Reserve Bank's Subbarao Says

April 27 (Bloomberg) --- Reserve Bank of India Governor Duvvuri Subbarao said faster inflation is a “big worry” for the country’s economy and the central bank plans to remove monetary stimulus in a gradual manner to ensure sustained growth.

While the tightening of monetary policy may be “anti- growth” in the short term, it is “certainly in the best interest” of the economy in the longer term, Subbarao said in a speech yesterday at the Peterson Institute for International Economics in Washington. The country’s central bank chief on April 20 raised three policy rates by a quarter point each to slow inflation from a 17-month high.

“The big worry is inflation,” Subbarao said. “Supply- side inflation pressures are abating only gradually, meanwhile demand-side pressures are building up.”

Benchmark wholesale-price inflation in India accelerated to 9.9 percent in March, the fastest in 17 months, government data showed. Consumer prices paid by industrial workers in India rose 14.9 percent in February from a year earlier. The price pressures are in part due to the lack of adequate infrastructure such as roads and ports.

To combat inflation, the RBI last week raised the benchmark reverse-repurchase rate to 3.75 percent from 3.5 percent and the repurchase rate to 5.25 percent from 5 percent. It also ordered lenders to set aside more cash as reserves, raising the cash reserve ratio to 6 percent from 5.75 percent.

“We have begun the process of monetary tightening in earnest,” Subbarao said. “We need to be calibrated” in exiting from fiscal and monetary stimulus because private consumption and investment haven’t fully recovered, he said.

Leading Global Recovery

In Asia, which is leading the recovery from the global recession, central banks including Malaysia and Vietnam are also raising interest rates or taking steps to remove excess cash from their banking systems to fend off inflation risks.

India’s $1.2 trillion economy, Asia’s largest after Japan and China, probably expanded as much as 7.5 percent in the fiscal year ended March 31, and may grow 8 percent in the current year, Subbarao said yesterday. The International Monetary Fund estimates India will expand 8.8 percent this year and 8.4 percent next year, higher than it projected in January.

“India’s growth is getting more broad-based,” Subbarao said. “Industrial growth is quite robust. Credit growth is picking up.”

While India is coping with the fastest inflation among Group of 20 nations, “supportive liquidity conditions” are needed to help the government sell more debt, the RBI chief said last week when he raised rates for the second time in a month.

Capital Flows

Emerging markets need to take urgent action on the surge of liquidity and capital flowing into their economies because they could spur inflation and trigger another crisis, economists at Standard Chartered Plc wrote in a report.

India may attract large capital flows from overseas, posing a “challenge” for currency and monetary management, Subbarao said in a statement April 24.

India “may well employ” some form of capital controls on inflows should such investments surge, he said yesterday.

“If capital flows resume and we intervene in the foreign exchange markets for whatever reason, there’ll be pressures on the liquidity side, and that will put further pressures on inflation,” he said, adding that he was not suggesting the central bank will step in.

A lack of intervention may raise concerns about an appreciation of the rupee, which would hurt export growth, he said. India’s currency is the second-best performer in Asia this year, having climbed 4.8 percent against the dollar compared with a gain of 7.6 percent for Malaysia’s ringgit.