Subbarao's Accelerated Rate Increases Leave India Inflation Eroding Income
Duvvuri Subbarao, governor of the Reserve Bank of India (RBI). Photographer: Adeel Halim/Bloomberg
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)
July 28 (Bloomberg) -- Vikas Pershad, chief executive officer of Chicago-based Veda Investments LLC, talks with Bloomberg's Susan Li about the outlook for Indian stocks. Pershad, speaking from Chicago, also discusses India's economy and central bank monetary policy. (Source: Bloomberg)
The accelerated pace of interest- rate increases by India’s central bank may fail to quell the fastest inflation in the Group of 20 as the nation suffers the consequence of underinvestment in electricity and transportation.
Reserve Bank of India Governor Duvvuri Subbarao boosted one of the benchmark rates by a half point yesterday for the first time since 2008, and pledged to review borrowing costs at meetings every six weeks, up from once a quarter. The steps followed five months of wholesale inflation exceeding 10 percent.
Subbarao’s efforts are hampered by what he said yesterday are capacity limits across a “wide range” of industries, a trend likely to leave inflation undermining the purchasing power of a population where the poor outnumber those in Sub-Saharan Africa. An even faster pace of rate increases would risk curbing the credit needed to invest in power, roads and railways.
“Inflation is likely to remain uncomfortably very high for a long time,” said Jahangir Aziz, the Mumbai-based chief economist for India at JPMorgan Chase & Co., who previously worked at the finance ministry. “What they are trying to do is to ensure that capacity constraints are eased with some amount of investment,” while at the same time trying to prevent inflation expectations from getting “out of hand,” he said.
The central bank yesterday raised its forecast for economic growth as a strengthening domestic demand trumps concern that the global economy will slow amid Europe’s debt crisis and elevated U.S. unemployment.
Stocks, Bonds
The Bombay Stock Exchange’s Sensitive Index fell 0.7 percent. India’s 10-year government bond yields climbed three basis points to 7.75 percent while the rupee declined 0.1 percent to 46.73 against the dollar as of 4:21 p.m. in Mumbai.
Higher borrowing costs, along with capacity limits to India’s infrastructure, make it tougher for the government to realize its goal of sustained 10 percent economic growth and cut poverty in the country. The World Bank estimates 76 percent of Indians live on less than $2 a day, compared with 72 percent in the Sub-Saharan African nations.
“When you have double-digit inflation in food, in fuel, in cotton for three-fourths of the population it starts to really pinch them,” Vikas Pershad, chief executive officer at Chicago- based hedge fund Veda Investments LLC, said in an interview with Bloomberg Television. “The RBI is moving in the right direction,” he added, predicting the repurchase rate will approach 7 percent in a year’s time.
Four Increases
The Reserve Bank has increased rates four times since March, the most by any central bank in Asia. The bank yesterday raised the reverse repurchase rate to 4.5 percent from 4 percent and the repurchase rate to 5.75 percent from 5.5 percent, as it forecast the inflation rate to reach 6 percent by March 31, higher than the 5.5 percent projected in April.
“We hope that inflation will come down to 5 percent in the long-term and in the medium term 4 to 4.5 percent,” Subbarao told economists and analysts in a conference call today. “We need to have a balance between inhibiting demand-side pressures and encouraging supply-side responses and that’s the balance we are trying to achieve.”
The central bank is also considering more rigorous tests of the nation’s banks to support confidence in the financial system, the Financial Times quoted Subbarao as saying yesterday.
Growth in India’s $1.2 trillion economy may accelerate to 8.5 percent, faster than the previous estimate of 8 percent, the bank said, straining capacities in power, ports and factories.
‘Out of Control’
“The inflation risk is heightened by capacities approaching their peak,” Subir Gokarn, a deputy governor at the central bank, said in an interview with Bloomberg UTV television channel in Mumbai yesterday. “Growth is approaching its potential and we want to keep it like that, but at the same time we want to ensure that it doesn’t go beyond a point where inflationary pressures go out of control.”
Maruti Suzuki India Ltd., the nation’s biggest carmaker, worked at capacity in the year through March and sold 1.02 million vehicles. The company now plans to spend 17 billion rupees to raise production to 1.25 million units a year, according to a statement on its website.
Tata Steel Ltd., India’s biggest producer of alloy, produced 6.6 million metric tons of crude steel in the year ended March 31, against a 6.8 million tons capacity. It won government approval in June to expand capacity by 43 percent to 9.7 million metric tons.
Infrastructure Woes
Constraints in ports and power also increase the cost of doing business in India.
Infrastructure spending accounts for just 4 percent of India’s gross domestic product compared with 9 percent of GDP in China, according to CLSA Asia-Pacific Markets.
As a result, China produced 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.
The average turnaround time for ships unloading and loading cargo at India’s major ports is almost four days, compared with 10 hours in Hong Kong, India’s finance ministry estimates.
Frederic Neumann, a Hong Kong-based economist at HSBC Holdings Plc., said the South Asian nation needs to step up investments in infrastructure to help cut companies’ operational costs. In 2009, China’s investment rate was 45 percent of its gross domestic product compared with 37 percent in India, Neumann said.
Rising wages are also fueling inflationary pressures in India.
Nokia India Pvt. said July 14 that it signed a long-term wage agreement with employees. 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.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net
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