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India May Raise Rates as Higher Prices Spark Protests

Duvvuri Subbarao, governor of the Reserve Bank of India
Duvvuri Subbarao, governor of the Reserve Bank of India (RBI), speaks during a news conference in Mumbai. Photographer: Adeel Halim/Bloomberg

India’s central bank is likely to raise interest rates for the fourth time since March after a strike to protest rising prices brought much of the nation to a halt this month.

The Reserve Bank of India will probably increase its reverse repurchase rate by a quarter-point to 4.25 percent, all 20 forecasts in a Bloomberg News survey showed. It will raise the repurchase rate to 5.75 percent from 5.5 percent at the 11:30 a.m. announcement in Mumbai tomorrow, according to all but one analyst, who expects it to be kept unchanged.

Indian opposition parties, the organizers of the strike, may focus on attacking Prime Minister Manmohan Singh’s government for inflation when parliament resumes tomorrow after being adjourned today. Surging prices in Asia’s biggest economy after Japan and China have also triggered demands for higher wages at companies including Nokia India Pvt.

“The general strike called in early July shows that continued double-digit inflation has developed into a big political problem,” said Kevin Grice, an economist at Capital Economics Ltd. in London. “The government is now urging the RBI to do all that is needed to bring inflation down.”

Consumer prices paid by industrial and farm workers in India are running close to 14 percent, government data showed. That’s the most after Venezuela’s 32 percent inflation rate, according to Bloomberg data compiled from 82 countries.

Swap Rates

The cost of India’s one-year interest-rate swaps, derivatives used to guard against fluctuations in borrowing costs, rose to 5.90 percent at 9:13 a.m. in Mumbai, near a 20-month high, signaling investors are bracing for further increases in benchmark rates. The Bombay Stock Exchange’s Sensitive Index was little changed at 18,128.02 while the rupee gained 0.1 percent to 46.91 against the dollar.

“We plan to continue to oppose the government’s policies that have fueled inflation,” said Ravi Shankar Prasad, a spokesman at India’s main opposition Bharatiya Janata Party. “The poor are reeling under inflation due to the failed economic policies and mismanagement of the government.” The party led the July 5 countrywide strike.

The lower house of India’s parliament, which convened today for the monsoon session, adjourned after paying respects to members who died since the last sitting. Lawmakers will gather again tomorrow for business.

Not Acceptable

Singh’s top economic advisers, Chakravarthy Rangarajan and Montek Singh Ahluwalia, urged the central bank this month to tighten borrowing costs, saying inflation above 10 percent is not acceptable.

Tomorrow’s rate decision will be announced at 11:30 a.m. instead of 11:15 a.m. as was planned earlier, the central bank said in a statement today.

A rate increase will put Governor Duvvuri Subbarao ahead of his counterparts in Asia in tightening monetary policy as the region leads the global economic recovery. Malaysia has raised rates three times this year, while Korea and Thailand have increased them once. The Philippines and Indonesia have kept them on hold.

Prices are rising in India as its record 8.4 percent average economic growth since 2004 is straining capacities in roads, ports and factories. China expanded an average 10.1 percent during the same period and consumer prices rose 2.9 percent in the country in June.

India, China

“India has always been underinvested and if you look at China, they are very strongly invested and that’s one of the reasons why China can grow very fast without seeing inflationary pressures” said Frederic Neumann, a Hong Kong-based economist at HSBC Holdings Plc. “The key to changing that over time will be to raise investment.”

In 2009, China’s investment rate was 45 percent of its gross domestic product compared with 37 percent in India, Neumann said.

Higher investment helped China produce 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, forcing most companies to invest in back-up generators, which push up costs.

Even so, manufacturers in India are augmenting their capacities to benefit from an economy that Goldman Sachs Group Inc. says will become the biggest after China and the U.S. by 2050.

Expanding Capacity

Apollo Tyres Ltd., India’s largest tire manufacturer by sales, added a fourth plant in April to boost capacity by 50 percent. Tata Steel Ltd., India’s largest producer, last month won environmental approval to increase steelmaking capacity by 43 percent to 9.7 million metric tons.

For now, India’s benchmark wholesale-price inflation may accelerate in July, the government’s top statistician T.C.A Anant said this month, after Singh’s government raised prices of gasoline and diesel on June 25 in a bid to cut the oil subsidy and narrow the budget deficit.

The wholesale-price index jumped 10.55 percent in June after climbing 11.23 percent in April, the most in 19 months.

Workers in several Indian factories went on strike in recent weeks, demanding more pay as living costs rose.

Nokia said July 14 that it signed a long-term wage agreement with employees, resolving a strike at their factory in the southern Indian city of Chennai. Neyveli Lignite Corp., a local miner and power producer, also pledged to raise salaries after employees stayed away from work.

“The biggest risk to the economy right now is inflation,” said Meghna Patel at STCI Primary Dealer Ltd. “The RBI will continue with its calibrated approach to raise interest rates.”

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