India’s Mukherjee Says Inflation Is a ‘Matter of Concern’

India's finance minister Pranab Mukherjee
India's finance minister Pranab Mukherjee speaks during an interview in Washington. Photographer: Andrew Harrer/Bloomberg

India’s rising prices are a concern that the central bank will have to weigh against the risks to growth from the European debt crisis, Finance Minister Pranab Mukherjee said.

Inflation “is a matter of concern,” Mukherjee said in an interview in Washington yesterday. “I do hope that the steps we’ve taken both on the demand side and supply side will have a moderating influence.”

India’s benchmark wholesale-price inflation unexpectedly accelerated 10.16 percent in May from a year earlier, near the fastest pace in 17 months, government data showed. The Reserve Bank of India will raise interest rates in a “calibrated” way given the cash squeeze in the economy and the threat posed by Europe’s crisis, Governor Duvvuri Subbarao said June 18.

“It is a matter of time” before the central bank increases rates, said Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd. “The central bank is waiting for normalcy in the liquidity situation before raising rates.”

Indian lenders are short of cash after telecommunication companies including Bharti Airtel Ltd. paid $14.6 billion of license fees for wireless phone services and businesses withdrew money for taxes.

The next monetary policy announcement is scheduled for July 27. The Reserve Bank has increased rates twice since mid-March to control prices.

Overnight Rates

Overnight interbank rates advanced to 5.3 percent in Mumbai yesterday, higher than the repurchase rate of 5.25 percent at which lenders borrow from the central bank.

“We shall have to strike a balance between these two situations,” Mukherjee said, referring to economic growth and the acceleration in prices. “We are watching the situation,” he said, adding any comment on rate increases would be “premature.”

India’s inflation may slow to about 5 percent by March, the finance minister said earlier this week in a speech at the Institute of International Finance in Washington.

The country’s $1.2 trillion economy expanded 8.6 percent in the three months through March from a year earlier, the fastest pace after China and Brazil among major economies. The nation’s growth rate may be “8.5 percent plus” this year and reach 9 percent next year, Mukherjee said yesterday.

Expansion in the manufacturing and services industries has “contributed substantially to the higher growth,” Mukherjee said. In setting its own borrowing schedule, the government will ensure that Indian businesses are “not elbowed out of the market” for credit requirements, he said.

“The cost of credit is moderate” for companies, he said.