India Raises Benchmark Rate More Than Forecast in Battle to Rein in Prices
July 27 (Bloomberg) -- Indranil Pan, chief economist at Kotak Mahindra Bank Ltd., talks with Bloomberg's Mark Barton about the outlook for Reserve Bank of India monetary policy. India needs tighter monetary policy to cool inflation, the central bank said, signaling the possibility of an interest-rate increase today. Pan, speaking from Mumbai, also discusses the government's decision to allow state-run refiners to raise gasoline and diesel costs in a bid to cut its subsidies bill. (Source: Bloomberg)
India’s central bank increased a key interest rate more than economists forecast, battling to contain a surge in inflation that’s led to strikes and street rallies.
The central bank raised the reverse repurchase rate a half point to 4.5 percent, and the repurchase rate to 5.75 percent from 5.5 percent, it said in Mumbai. Today was the first time officials boosted one of the main rates by more than a quarter point since the last series of increases in 2008; the median forecasts in Bloomberg News surveys were for quarter-point moves.
Governor Duvvuri Subbarao has tightened monetary policy faster than his counterparts in Asia this year, a pace that hasn’t stopped workers from demanding higher wages at companies from Infosys Technologies Ltd. to Nokia India Pvt. The opposition intensified their attack on Prime Minister Manmohan Singh in parliament today as the benchmark wholesale inflation rate hovered above 10 percent for a fifth month.
“Inflation has become the dominant political and economic issue in India,” said Jay Shankar, chief economist at Religare Capital Markets Ltd. in Mumbai. “The RBI needs to continue to be aggressive with rate hikes to slow inflation.”
Stocks and rupee rose on India’s economic growth prospects, while the yield on the 10-year government bond climbed to the highest level in almost three months on inflation risks. The Bombay Stock Exchange’s Sensitive Index gained 0.3 percent, while the rupee rose 0.8 percent to 46.665 against the dollar, the biggest advance in five weeks. Bond yields jumped five basis points to 7.72 percent.
Inflation Estimate
The central bank boosted its estimate for wholesale-price inflation for the year to March to 6 percent from 5.5 percent and the economic growth forecast to 8.5 percent from 8 percent during the period.
While India’s growth has accelerated in recent years and helped raise the global profile of its biggest companies, inflation is imperiling the purchasing power of a population where almost three quarters live on less than $2 a day.
Consumer prices paid by industrial and farm workers in India are running close to 14 percent, government data show. That’s the most after Venezuela’s 32 percent inflation rate, according to Bloomberg data compiled from 82 countries.
Meet More Often
“We hope to get closer to some sort of a neutral situation or neutral levels soon,” Subbarao told reporters in Mumbai today after the decision. “The stance has clearly changed since April to managing inflation and inflationary expectation from the one of balancing growth and inflation.”
The central bank also said today that it plans to release monetary-policy statements every six weeks instead of once a quarter, according to the statement. The next announcement will be on Sept. 16.
“This is a step in the right direction and gives the central bank more flexibility in giving the right signals to markets,” said Tim Condon, ING’s chief Asia economist in Singapore. “That’s how modern central banks should be working in a fast changing world.”
India’s move comes after Malaysia raised rates three times this year, while Korea and Thailand increased them once. The Philippines and Indonesia have kept them on hold. In Australia, central bankers have boosted rates six times since early October as an economic expansion powered by Chinese demand for the country’s commodities sparked inflation pressures.
‘Supply Constraints’
Prices are rising in India as its record 8.4 percent average economic growth since 2004 is straining capacities in roads, ports and factories. China expanded an average 10.1 percent during the same period and consumer prices rose 2.9 percent in the country in June.
“India is facing higher inflation because it didn’t address its supply constraints,” Jahangir Aziz, a Mumbai-based economist with JPMorgan Chase & Co., said before the report.
Frederic Neumann, a Hong Kong-based economist at HSBC Holdings Plc. said the South Asian nation needs to step up investments in roads, ports and factories to expand capacities. In 2009, China’s investment rate was 45 percent of its gross domestic product compared with 37 percent in India, Neumann said.
Higher investment helped China produce 346.7 billion kilowatt-hours of power last month, data from the Beijing-based National Bureau of Statistics showed. That’s about six times the electricity generated in India each month, according to the nation’s Central Electricity Authority, forcing most companies to invest in back-up generators, which push up costs.
Fuel Prices
“Capacity constraints are visible in several sectors and pricing power is returning to producers,” Subbarao said in the monetary policy statement. “Given the spread and persistence of inflation, demand-side inflationary pressures need to be contained.”
The inflation rate may jump by about a percentage point, the finance ministry estimates, after Singh on June 25 allowed state-run refiners including Indian Oil Corp. to raise fuel prices.
Moody’s Investors Service yesterday welcomed that decision, saying it will help cut the government’s budget deficit. It raised the country’s local currency debt rating to Ba1, the highest non-investment category.
Subbarao has held off on adopting a faster pace of rate increases, pursuing a “calibrated” approach with one eye on risks posed to the global economic recovery from Europe’s debt crisis, along with a cash shortage caused by corporate tax payments.
Global Concern
“If the global recovery falters, the risk of which has increased since the April 2010 policy announcement, the performance of emerging market economies is likely to be adversely affected,” Subbarao said. “While India’s trade linkages with the advanced economies are appreciably smaller than those of other emerging economies, a widespread slowdown in global trade will have an impact on manufacturing and service sectors.”
Manufacturers in India are augmenting their capacities to benefit from an economy that Goldman Sachs Group Inc. says will become the biggest after China and the U.S. by 2050.
Apollo Tyres Ltd., India’s largest tire manufacturer by sales, added a fourth plant in April to boost capacity by 50 percent. Tata Steel Ltd., India’s largest producer, last month won environmental approval to increase steelmaking capacity by 43 percent to 9.7 million metric tons.
Nationwide Strike
For now, opposition parties are stalling proceedings in the monsoon session of parliament that started yesterday. The upper and lower houses of the Indian parliament were adjourned until noon today as opposition lawmakers sought a special debate on rising prices.
The disruption came after they organized a nationwide strike on July 5, forcing schools, shops and offices to remain shut and disrupting air, road and rail transport in several parts of the country.
“Inflation will dominate the parliament agenda and we need a satisfactory answer on why prices can’t be curbed,” S.S. Ahluwalia, a lawmaker from the opposition Bharatiya Janata Party, said before the rate decision.
Workers in several Indian factories went on strike in recent weeks, demanding more pay as living costs rose.
Nokia said July 14 that it signed a long-term wage agreement with employees, after workers stayed away from work at their factory in the southern Indian city of Chennai.
Wipro Ltd., India’s third-largest software exporter, said it increased salaries by 9 percent in the quarter ended March 31, while larger rival Infosys Technologies Ltd. gave 14 percent to 16 percent wage increases to retain workers.
“Inflation is now being significantly driven by demand- side factors,” Subbarao said. “It is imperative that we continue in the direction of normalizing our policy instruments to a level consistent with the evolving growth and inflation scenarios.”
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net
Rate These Stories
Rate this Page