Gokarn Signals India Inflation May Prevent Lower Interest Rates: Economy

India’s persistently high inflation may prevent an imminent reversal of record interest-rate increases, as a weakening rupee and oil’s rebound reduce the scope for monetary easing, the central bank’s deputy chief said.

“The monetary cycle has peaked,” Subir Gokarn, deputy governor of the Reserve Bank of India (RBI), said at a conference in Singapore today. “That does not necessarily say that a quick reversal is in order because inflation risks are still visible, still high.”

The Reserve Bank of India refrained from raising interest rates last month after the economy expanded in the third quarter at the slowest pace in two years. Pressure is mounting on Asian central banks to ease monetary policy and protect growth as the global rebound slows amid Europe’s debt crisis.

“It won’t be easy for the central bank to cut rates aggressively,” said Siddhartha Sanyal, chief economist for India at Barclays Capital in Mumbai. “Inflation is still high. Global commodity prices such as oil are still elevated and the weaker rupee is adding to the import prices of these commodities.”

Emerging markets from Turkey to Thailand have already lowered rates, with India’s scope to follow suit limited by the highest inflation rate among the BRIC nations, which include Brazil, Russia and China.

India “will have to cut rates at some point, maybe in the second quarter or towards the end of the first quarter,” Sanyal said, citing weakening economic growth.

‘Very Concerned’

The RBI is “very concerned” about the impact of rupee depreciation on inflation, Gokarn also said today. The rupee is Asia’s worst performing currency in the past year, after sliding more than 14 percent. It traded at 52.795 per dollar as of 2:24 p.m. in Mumbai.

The central bank remains more comfortable using open-market operations to inject liquidity for now, because cutting the cash reserve ratio would send a “premature” signal that the monetary policy stance has changed, Gokarn said.

India’s food-price index fell for the first time in at least 5 1/2 years after prices of onions, potatoes and wheat declined, a report showed today. The gauge measuring wholesale prices of agricultural products dropped 3.36 percent in the week ended Dec. 24 from a year earlier, the commerce ministry said.

Regional Inflation

Elsewhere in the region today, Australia unexpectedly reported that its trade surplus narrowed in November as shipments of resources abroad slowed while aircraft imports increased. Exports exceeded imports by A$1.38 billion ($1.4 billion), a government release showed in Sydney. The median estimate in a Bloomberg News survey of 10 economists was for a surplus of A$1.65 billion.

Taiwan’s consumer prices unexpectedly rose at the fastest pace in 22 months in December as the cost of food surged, with a report showing inflation accelerated to 2.03 percent.

In the Philippines, inflation eased to an 11-month low of 4.2 percent in December, a report showed. Bangko Sentral ng Pilipinas Governor Amando Tetangco said today that the central bank “will make adjustments as necessary” to rates as easing price pressures bolster confidence that inflation remains manageable “over the policy horizon.”

In Europe today, a government report may show German retail sales rose 0.2 percent in November from a month earlier, according the median estimate in a Bloomberg News survey of economists.

Europe Reports

Other reports may show the consumer-price index in the Netherlands fell 0.5 percent in December from a month earlier and growth in the U.K. services industry slowed last month. Ireland releases labor market (IEUERT) figures for December.

In the U.S., a Labor Department report may show first-time claims for unemployment (INJCJC) benefits fell to 375,000 in the week ended Dec. 31 from 381,000 a week earlier, a separate survey of economists showed. The Institute for Supply Management’s non- manufacturing index may have ended a three-month slide and risen to 53 in December from 52 a month earlier.

The U.S. Labor Department tomorrow is scheduled to release its monthly employment report, which economists surveyed expect will show an increase last month of 150,000 in nonfarm payrolls from a 120,000 gain the previous month. The nation’s unemployment rate is forecast at 8.7 percent.

A jump in oil prices risks stoking price pressures just as they start to ease, with crude trading at $102.98 a barrel in New York, near the highest level since May 2011. It’s climbed 29 percent in the past three months amid speculation that U.S. crude stockpiles are shrinking and as tension rose over Iran’s nuclear program.

Fiscal Erosion

Higher fuel costs risk worsening fiscal balances in a number of countries, including India, that subsidize necessities for their populations. Prime Minister Manmohan Singh said Dec. 31 India must reform its tax code and phase out fuel subsidies to stabilize the South Asian nation’s finances. State-run refineries sell diesel, kerosene and cooking gas below cost.

India’s benchmark inflation (INFINFY) gauge slowed to a one-year low of 9.11 percent in November from 9.73 percent the previous month. By comparison, China’s main index of prices rose 4.2 percent in November from a year before.

Manufacturing and services growth improved in India in December, a sign that Asia’s third-largest economy so far is withstanding the fallout from Europe’s debt crisis. The Purchasing Managers’ Index for manufacturing and services climbed to 54.2 in December, HSBC Holdings Plc and Markit Economics said this week. Readings above 50 indicate expansion.

India’s benchmark repurchase rate is 8.5 percent after 13 increases since mid-March 2010. Policy makers next meet on Jan. 24 to decide on borrowing costs. Economic expansion moderated to a pace of 6.9 percent in the three months through September from a year earlier.

Downside risks to the global economy are escalating, International Monetary Fund Deputy Managing Director Zhu Min said at the conference in Singapore Gokarn was attending today.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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