Reuters | Sep 11, 2010 | 3:04pm IST
The Reserve Bank of India (RBI) will take ‘appropriate measures’ to tackle inflation, the finance minister said on Saturday, though he added that India could not go on a "reverse growth path". Pranab Mukherjee was speaking a day after data showed industrial output accelerated much faster than expected in July, strengthening the case for further monetary tightening by the central bank to tame near double-digit inflation. Recent signs of cooling growth in Asia’s third-largest economy, along with a sluggish global economic recovery, had tempered expectations for a rate increase at the central bank’s policy review on Sept. 16.
But economists said the surprisingly strong industrial performance boosted the chances of a rate rise next week. "Inflation is a concern. I am concerned that prices are increasing," Mukherjee said in Kolkata. "RBI will take appropriate measures as and when needed. But at the same time, I cannot go on a reverse growth path." Pranab Mukherjee said India would likely grow between 8.5-8.75 percent in the fiscal year ending next March, therefore possibly exceeding earlier growth estimates of 8.5 percent. Industrial output rose 13.8 percent in July from a year earlier, nearly double analysts’ forecasts for a 7.7 percent rise. It was the fastest growth since April.
If only inflation woes could be washed away by the summer monsoon. Instead, India is girding itself for a “new normal” of inflation running at 6 to 8 percent, from the roughly 5 percent considered acceptable by policymakers in recent years, as a racing economy exacerbates structural bottlenecks. India’s growth-obsessed government appears resigned to elevated inflation, which has consistently outrun its forecasts and become a distracting liability for the ruling Congress party. Both consumer and wholesale price indices are in double-digits, making Indian inflation the highest among large economies. “What India will go into is this period when inflation remains elevated and sticky,” said Jahangir Aziz, chief India economist at JPMorgan, who expects inflation of 7.5 to 8 percent over the next 18 to 24 months.
While the government is taking steps to address long-standing infrastructure bottlenecks and stagnant farm output, the slow pace of implementation means investment and reforms will struggle to keep up with rising demand and rampant urbanisation. “The problem is the agricultural sector needs productivity growth, cities need better infrastructure, the country in general needs better infrastructure to take the pressure off inflation,” said Sanjay Mathur, head of research and strategy for non-Japan Asia at Royal Bank of Scotland in Singapore. The danger of stubbornly rising prices is that inflationary expectations can feed on themselves, fuelling asset price bubbles and eroding export competitiveness. That in turn can force the central bank to tighten monetary policy more aggressively than it would otherwise do, at the risk of choking off growth. In any case, it removes the margin for error in setting monetary policy.
In India, the policy response is complicated by the fact that food inflation, a key driver of higher prices, is beyond the scope of monetary policy. Inflation can also widen the wealth gap in a country where nearly 40 percent of the 1.2 billion population lives on less than $1.25 a day but the ranks of dollar millionaires have grown at 11 percent a year over the past decade, to 115,000. Already, high prices have triggered protests and the government’s late June decision to lift fuel prices led to a one-day nationwide strike called by the opposition. Without bolder efforts to improve farm output, the government will be forced to rely more on imports and subsidies to the “aam admi”, or common man, that makes up its voter base, adding to a stressed fiscal position and leaving less cash available for much needed investment. Continue reading
Reuters | Thu Jul 29, 2010 | 1:42pm IST
A Reserve Bank of India official said current policy rates will not tame inflation and aggressive action is needed, two days after it raised rates more sharply than expected and adopted a hawkish tone. Bond yields and swap rates rose following the remarks, which were unusually forceful for a Reserve Bank official. Also on Thursday, India reported that food inflation eased in mid-July but fuel inflation rose slightly. "You are injecting liquidity at 5 percent and inflation is at 10 percent. They will never be able to control inflation, everything else remaining the same," the official told reporters, declining to be identified. "Monetary policy has to be aggressive," the official said. Wholesale price index (WPI) inflation is on track to hit 11 percent in July, which would make it six straight months in double digits, and many economists have said the Reserve Bank of India (RBI) is behind the curve in taming inflation despite four interest rate increases since March.
"Monetary policy works with a time lag," the RBI official said, adding that the summer monsoon rains will have more impact in curbing inflation over the next 2-3 months due to the time-lag in monetary transmission. Last summer’s poor monsoon sent food prices higher, but inflation has spread generally into the economy. This summer’s monsoon is normal, which officials are counting on to improve harvests and take pressure off prices. "Rates should have come up much higher (by now)," the official told reporters after a meeting with senior finance ministry officials. "RBI is not the real monetary policy maker," the official said, hinting that the finance ministry has a large role to play in monetary policy decisions. Most economists polled by Reuters following the RBI’s policy tightening on Tuesday expect it to lift rates again by the end of September, implying they expect the central bank to take advantage of its newly announced plan to double the frequency of policy reviews to eight times a year.
"Post the central bank official’s comments, interpolicy rate hike fears are back — notwithstanding the fact the next policy is just six weeks away and some key data like IIP is still pending. Markets are living on the edge," said R. K. Gurumurthy, head of treasury at ING Vysya Bank. India’s benchmark 10-year bond yield rose as much as 5 basis points (bps) to 7.79 percent after the central official’s comments. The one-year swap rate was up 7 bps at 6.20 percent, from 6.13 percent before the statements, revisiting a near-21 month high of 6.20 percent touched on Wednesday, according to Thomson Reuters data.
Reuters | Sat Jul 24, 2010 | 12:09pm IST
Prime Minister Manmohan Singh on Saturday reiterated his prediction headline inflation would ease to 6 percent by December, a forecast more optimistic than that delivered by his economic advisers a day before. The prime minister’s Economic Advisory Council had said inflation would be at 7-8 percent by the year-end, compared with 10.55 percent in June, and its chairman recommended strong monetary action to tame runaway prices. Singh’s statement comes amid a growing divergence between the government and the central bank on the need for monetary tightening to cool inflation that has been in double digits for five straight months.
New Delhi puts high food prices as the cause and argues normal monsoon rains would cool inflation, while the Reserve Bank of India (RBI) says demand-side factors will continue to keep up pressure on inflation. On Saturday, Singh backed his officials’ view. "The present high rate of inflation is mainly due to food price inflation," he told a conference of top federal and state policymakers gathered to assess the country’s development plans. "The government has taken a number of steps to curb inflation. With a normal monsoon, which is the expectation at present, the rate of inflation will abate in the second half of the year."
Reuters | Fri Jul 23, 2010 | 10:53am IST
Inflation in India has spread beyond food and fuel prices and is becoming entrenched; meaning the Reserve Bank of India (RBI) may have little choice but to tighten policy more aggressively than now expected. A majority of economists polled by Reuters this week expect the RBI to raise interest rates by 25 basis points for a fourth time since March in its quarterly review on July 27. Most also expect the central bank to notch up rates by just another quarter point before the end of the year, given a tightening of market liquidity in recent weeks and uncertainty about the strength of global recovery. However, trends in broad money growth, the credit-deposit ratio and rising imports suggest inflationary pressures are likely to remain and may pose a bigger challenge later on, calling for a more aggressive action.
PACE OF IMPORT GROWTH MAY WIDEN TRADE GAP FURTHER
With India expected to grow more than 8 percent this year and next, imports are expected to pick up. Since export growth is weak, rising imports threaten to push up the trade deficit up substantially, in turn widening the current account deficit, which reached $13 billion in the January-March quarter, its biggest since 1981. A more decisive monetary tightening to curb domestic demand would help keep India’s external imbalances in check.
RESERVE MONEY GROWTH THREATENS TO PUSH INFLATION HIGHER
Reserve money has been rising rapidly in recent months. Before the financial crisis, reserve money consistently led broad money growth, the central bank’s key monetary gauge. Between 2000 and 2007 the annual change in reserve money had a 0.6 correlation with the year-on-year change in M3. That dropped to 0.4 for the ‘2000-2010’
Bloomberg News | Jul 19, 2010
India’s inflation will accelerate in July, the government’s top statistician said, increasing pressure on the central bank to raise interest rates next week for a fourth time in five months. “The inflation number in July will be higher than in June, in large measure because of what has happened to fuel prices,” T.C.A. Anant, 52, said in a July 16 interview in New Delhi, without providing details. The benchmark wholesale-price index jumped 10.55 percent in June after climbing 11.23 percent in April, the most in 19 months, a report showed last week. Prime Minister Manmohan Singh’s government on June 25 allowed state-run refiners including Indian Oil Corp. to raise prices of gasoline and diesel in a bid to cut its oil subsidy and narrow the budget deficit. Governor Duvvuri Subbarao is due to announce the next monetary policy decision on July 27.
“The full impact of the fuel price revision on inflation numbers is yet to be seen,” the New Delhi-based Federation of Indian Chambers of Commerce & Industry said in a report on July 17. “While normalization of the monetary policy is expected and the Reserve Bank of India would continue to tighten rates in the months ahead, premature and aggressive rollback of easy money policy can jeopardize growth.” Subbarao has increased the reverse repurchase and repurchase rates by three-quarters of a percentage point since mid-March. The reverse repurchase rate is 4 percent and the repurchase rate is 5.5 percent.
Reuters | Thu Jul 8, 2010 | 12:20pm IST
India’s food inflation eased, but fuel inflation accelerated in late June and a recent hike in fuel prices kept the case for the Reserve Bank of India (RBI) to top up its last Friday’s rate hike when it reviews policy on July 27. The second straight weekly fall in food inflation would give little cheer to policymakers as the recent fuel price hike could push up by over 1 percentage point what is already the highest headline inflation level among the G20 major economies. Data released on Thursday showed the food price index rose an annual 12.63 percent in the year to June 26, slower than the previous week’s 12.92 percent, largely as prices in the year-ago period were high. The fuel price index went up by 18.02 percent during the period, compared with the previous week’s 12.90 percent. The index will see another jump in its next reading, with the government having raised fuel prices from June 26.
The primary articles index rose by 16.08 percent, compared with 14.75 percent in the previous week. Following the fuel price decision, the RBI lifted its key rates earlier-than-expected by 25 basis points, the third hike so far this year, as it struggles to bring down inflation that a senior government official said could hit 11 percent in June. "When the full pass-through of the hike comes, there will be more of an impact on the prices of commodities," N.R. Bhanumurthy, an economist with New Delhi-based think tank National Institute of Public Finance and Policy said. "I would expect another 25 basis points hike in the July 27 review and after that one more round of an off-cycle hike."