Rajan Faces India Rate Quandary as CPI Tops 11% Amid Growth Woes

Photographer: Adeel Halim/Bloomberg

The Reserve Bank of India (RBI) headquarters stands in Mumbai. Close

The Reserve Bank of India (RBI) headquarters stands in Mumbai.

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Photographer: Adeel Halim/Bloomberg

The Reserve Bank of India (RBI) headquarters stands in Mumbai.

India’s consumer-price inflation exceeded 11 percent last month, adding pressure on central bank Governor Raghuram Rajan to raise interest rates again next week even as industrial output slid more than expected.

Consumer prices rose a more-than-estimated 11.24 percent in November from a year earlier, official data yesterday showed. Most economists in a Bloomberg News survey predict Rajan will hold the benchmark interest rate at 7.75 percent in a policy decision due Dec. 18, after raising it 50 basis points since he took over the Reserve Bank of India in September.

“We are very uncomfortable with the current level of inflation,” Rajan told reporters in Kolkata yesterday after the data were released. “Clearly growth is weaker than we would like, inflation is higher than we would like. It would be wonderful if we had the normal situation of extremely high growth and high inflation and extremely low growth and low inflation, in which case policy is very easy.”

The central bank’s push to stem price increases has damped spending in the world’s second-most populous nation, with another report yesterday showing industrial production slid 1.8 percent in October, the first contraction in four months. Prime Minister Manmohan Singh also faces pressure to curb government expenditure on subsidy programs ranging from fuel to food to avert a credit-rating downgrade to so-called junk status.

Photographer: Dhiraj Singh/Bloomberg

Raghuram Rajan, governor of the Reserve Bank of India. Close

Raghuram Rajan, governor of the Reserve Bank of India.

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Photographer: Dhiraj Singh/Bloomberg

Raghuram Rajan, governor of the Reserve Bank of India.

The inflation reading exceeded the median estimate of 10 percent in a Bloomberg News survey, while the contraction in factory output topped the median forecast of a 1.2 percent decline.

‘No Choice’

“The central bank has been with left no choice but to tighten interest rates,” said Rupa Rege Nitsure, an economist at Bank of Baroda in Mumbai. “Production has slowed so much, yet prices are not coming down.”

Eight of 10 economists in a Bloomberg survey expect the central bank to leave the repurchase rate unchanged at the next decision, while two expect a 25-basis point increase.

“We are aware of the weak economy, but we also have to take into account inflationary pressures,” Rajan said.

The consumer-price gauge was created in January 2011 and the government began publishing a year-on-year rate from 2012. The index is now climbing at the fastest pace in the Group of 20 major economies, according to data compiled by Bloomberg.

Wholesale prices rose 7 percent in November from a year earlier, the same pace as October and the highest since February, according to the median estimate in a Bloomberg News survey before a report due Dec. 16.

Elections Approach

The rupee, which has slid 12 percent against the dollar in the past 12 months, weakened 0.9 percent to 61.83 at the close in Mumbai yesterday. The S&P BSE Sensex (SENSEX) index fell 1.2 percent. The yield on the 10-year government bond maturing November 2023 rose to 8.85 percent from 8.83 percent on Dec. 11. Yesterday’s data were released after the close of trading.

India’s main opposition Bharatiya Janata Party won four of five state elections held over the past five weeks, giving it momentum ahead of a national vote due by May. The stock market hit an all-time high this week after the results as investors bet on the ouster of Singh’s decade-old administration, which last fiscal year oversaw the slowest annual growth since 2003.

Political parties must work together to ensure the government that emerges after polls can pass measures necessary to boost economic growth, according to Rajan.

India’s economic expansion accelerated to 4.8 percent last quarter, spurred by higher exports. That expansion faces risks from the need to raise interest rates further to contain the cost of living in the nation of 1.2 billion people, about two-thirds of whom live on less than $2 per day.

Goldman Sachs Group Inc. predicts Rajan will boost the repurchase rate to 8.5 percent in 2014.

Slower Indian growth has hurt companies such as Maruti Suzuki India Ltd. (MSIL), India’s largest carmaker. Maruti’s sales fell 10.7 percent in November. The economy will expand 5 percent in the year ending March, the RBI forecasts.

To contact the reporters on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net; Kartik Goyal in Mumbai at kgoyal@bloomberg.net

To contact the editor responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net

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