A good monsoon in India may ease the country’s inflationary pressures, allowing the central bank to continue its “moderate” pace of policy tightening, Deputy Governor Subir Gokarn said today.
“If the monsoons are good, we will see a moderation in food prices and that will, of course, then ease the inflationary pressures that we’re facing,” Gokarn told reporters after speaking at a conference in Singapore. “Our monetary policy stance is to make a steady correction in our policy position.”
The Reserve Bank of India has raised interest rates twice since mid-March as inflation accelerated with a rebounding economy. Still, India’s 10-year bonds rose for a second day yesterday on speculation Europe’s widening debt turmoil will hamper a global recovery, reducing the need for rapid interest- rate increases in Asia’s third-largest economy.
India’s economy would be hurt should the sovereign debt crisis that originated in Greece spread, Finance Minister Pranab Mukherjee said last week. The European Union is India’s biggest overseas market, accounting for a fifth of the nation’s merchandise exports.
“Investors are betting that the central bank may re-think its exit strategy in light of the global developments even though our growth is pretty strong,” Srinivasa Raghavan, head of fixed-income trading in Mumbai at IDBI Gilts, said yesterday.
India’s economy is in a “reasonably strong recovery” and has domestic drivers of growth that can offset unfavorable global shocks, Gokarn said. Still, the country needs to repair its fiscal situation after increasing spending during the global financial crisis, he said.
India this week delayed a decision to raise prices of fuels including gasoline and diesel on concern higher costs will stoke inflation. Raising fuel prices would help the government cut expenditure on subsidies to oil refiners which were 260 billion rupees ($5.5 billion) last year.
An increase in the local prices of diesel and gasoline will contribute to cut India’s budget deficit, Gokarn said yesterday.
“I don’t think fuel subsidies are a critical driver of inflation,” he said today. “If the food price situation turns favorable, conditions will be created for an adjustment in energy prices.”
India is relying on sufficient rains in the June-September monsoon season to boost farm production and drive down food prices, after last year’s showers were the least since 1972. Rains are the main source of irrigation for India’s agriculture industry.
A “normal” monsoon season this year would enable food prices to “soften very quickly” and cool inflation “sharply,” Gokarn said.
The Reserve Bank last raised rates in April, increasing its benchmark reverse repurchase rate by a quarter percentage point to 3.75 percent, while wholesale-price inflation was 9.59 percent that month.
“We chose to follow a path of moderate tightening, partly conditioned by global uncertainties and instabilities, and that perspective remains,” Gokarn said today. “If the crisis deepens and widens and we start to see more significant spillovers, that will cause a need to reassess the situation but for the moment, I think it has not really fundamentally affected our position.”