India’s Central Bank Expects Inflation to Ease, Subbarao Says

India’s central bank expects price pressures to ease, Reserve Bank of India Governor Duvvuri Subbarao said, as the nation fights the fastest inflation among major emerging economies.

“Our endeavor, our effort and our expectation is inflation will come down,” Subbarao said in a speech at a town hall event in the southern Indian state of Puducherry yesterday. “Our goal is for low and steady” inflation levels.

The central bank left borrowing costs unchanged last month for a third meeting to damp an inflation rate above 7 percent, while reducing bank reserve ratios to support a recent push by the government to revive growth. Prime Minister Manmohan Singh has allowed more foreign investment and raised diesel prices to pare fuel subsidies, part of a burst of policy changes after months of inaction dimmed the economy’s outlook.

The rupee has appreciated more than 6 percent against the dollar since the government began the policy revamp on Sept. 13, paring its drop in the past 12 months. The BSE India Sensitive Index (SENSEX) rose 0.2 percent yesterday, while the yield on the 10-year bonds due June 2022 declined to 8.15 percent from 8.16 percent.

Headline inflation accelerated to 7.55 percent in August, the fastest pace in the BRIC group of largest emerging nations, which includes Brazil, Russia and China.

The central bank remains focused on inflation and plans to review its estimate for the financial year through March at its next monetary policy meeting, Deputy Governor Subir Gokarn told reporters in Chennai yesterday. The central bank raised its inflation estimate to 7 percent in July.

Comfort Level

India faces price pressures from a more than 5 percent decline in the rupee against the dollar in the past year and a weak monsoon that may stoke food costs by crimping farm output, according to the central bank. Governor Subbarao has said the comfort level for inflation may be about 5 percent.

The monetary authority left its benchmark repurchase rate at 8 percent on Sept. 17. It reduced the cash reserve ratio to 4.5 percent, the lowest level since 2004, from 4.75 percent.

The government raised diesel tariffs on Sept. 14 for the first time in over a year, the same day it opened industries including retail and aviation to more overseas investment.

Retail FDI

The government’s decision to allow foreign investment in supermarket chains will benefit producers and buyers and create more jobs, Subbarao said.

“It will help consumers, in the sense that they will get better quality, presumably at low prices,” he said.

Singh’s government is trying avert a ratings downgrade by bolstering growth and curbing a subsidy program ranging from diesel to fertilizers to meet its budget deficit goal of 5.1 percent of gross domestic product in the 12 months through March 2013 from 5.8 percent.

The Indian economy has the ability to withstand high current account and fiscal deficits, Subbarao said. India’s current account, the broadest measure of trade, narrowed to $16.4 billion in the three months ended June 30, compared with a $21.7 billion gap from January through March, the Reserve Bank of India said in a statement on Sept. 28.

The fiscal shortfall and a deficit in the current account led Standard & Poor’s and Fitch Ratings to say earlier this year that they may strip India of its investment-grade credit rating.

The Reserve Bank has signaled that curbing the budget shortfall is pivotal to increasing room for rate cuts to bolster economic expansion, which weakened to a nine-year low of 6.5 percent last fiscal year.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

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

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