India’s Inflation Challenge Is ‘Significant,’ RBI Says
India’s challenge to contain inflation “remains significant” and the weakening of the rupee has emerged as a “new source” for price pressures, the central bank said, signaling the need for higher interest rates.
“The baseline inflation path still remains sticky and broadly unchanged from earlier projections,” the Reserve Bank of India said in a report before its rate-setting meeting tomorrow in Mumbai. “This has made policy choices more complex. Some sacrifice of growth is inevitable in the current milieu of high inflation.”
Inflation in India has exceeded 9 percent since December even after record rate increases starting March, 2010. India’s monetary stance contrasts with emerging nations from Brazil to Russia, which have reduced borrowing costs to shield their economies from Europe’s debt crisis and a faltering U.S. recovery.
“The RBI doesn’t have the comfort as compared to other nations given the acute inflationary pressures India is facing,” said Anubhuti Sahay, a Mumbai-based economist at Standard Chartered Plc. “Though there are risks to growth, the RBI will prefer to tighten rates in its fight against inflation.”
BRIC Inflation
Sahay is among the 18 of 28 economists in a Bloomberg News survey who expect the Reserve Bank to boost its repurchase rate by a quarter of a percentage point to 8.5 percent tomorrow. The rest expect no change.
The RBI is scheduled to release its monetary-policy announcement at 11 a.m. in Mumbai tomorrow.
Benchmark 10-year government bonds were little changed today. The yield on the 7.80 percent note due April 2021 held at 8.82 percent, a three-year high, in Mumbai, according to data compiled by Bloomberg. The BSE India Sensitive Index gained 0.9 percent and the rupee strengthened 0.4 percent to 49.83 against the dollar.
India’s main inflation gauge measured by wholesale prices was 9.72 percent in September. By comparison, consumer prices rose 7.3 percent in Brazil, 6.1 percent in China and 7.2 percent in Russia among the BRIC nations.
Rupee Slump
The depreciation of the rupee has emerged as a “new source of price pressures,” the report said. India’s imports account for 22 percent of the economy and a decline in the rupee increases the risk of imported inflation, the report said.
India’s rupee has weakened 10.3 percent against the dollar this year as investors sold stocks in emerging markets because of risks to global growth, making the currency the worst performer in Asia.
Even so, the central bank said that the fall in the rupee is in line with other emerging-market currencies and “with falling global commodity prices partly offset by rupee depreciation, the risks to inflation projections are now balanced.”
Inflation is a political issue in India as it erodes spending power in a nation where the World Bank estimates more than 75 percent of the population lives on less than $2 a day.
Policy Direction
Reserve Bank Governor Duvvuri Subbarao said Oct. 12 that inflation must cool before India’s central bank can start easing monetary policy.
The governor in July predicted inflation to ease to 7 percent by March 31. He forecast India’s economy will expand about 8 percent in the fiscal year through March from 8.5 percent in the previous year.
Subbarao has boosted the central bank’s benchmark rate by 350 basis points in 12 moves since mid-March 2010, the fastest round of increases since the central bank was established in 1935, Bloomberg data show.
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, according to the Central Statistical Office. 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.
Growth Forecast
India’s economy may expand 7.6 percent in the fiscal year through March 31, according to a survey compiled by the central bank of forecasts from agencies including the International Monetary Fund and the Asian Development Bank, the report showed. The survey in July projected growth of 7.9 percent.
Inflation may average 8.8 percent in the financial year, the survey said, compared with its previous estimate of 8.6 percent.
“The challenge at this juncture is to contain inflationary pressures, while factoring in the lags in monetary transmission, which are long and variable and therefore difficult to assess,” the central bank said.
The central bank said India’s “fiscal policy space” may be constrained if inflation stays elevated. On current assessment, India is unlikely to meet its budget-deficit target for the year through March, the central bank said.
Finance MinisterPranab Mukherjee aims to narrow the budget deficit to a four-year low of 4.6 percent of gross domestic product by March 31.
“Inflation is a much bigger problem in India than in other nations,” Indranil Sen Gupta, a Mumbai-based economist at Bank of America Merrill Lynch, said before the report. “While growth has started easing, there is no meltdown yet. On balance, the RBI will tilt toward controlling inflation and raise rates.”
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