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Mukherjee Says ‘Abnormally’ High Rates Will Hurt India Growth

India’s economic growth may slow if interest rates are increased too fast, Finance Minister Pranab Mukherjee said, supporting the central bank’s strategy to boost borrowing costs in a “calibrated” way to cool inflation.

“If interest rates are hiked abnormally, naturally, there will be no investment, there will be no growth, there will be no job creation,” Mukherjee said in a debate on inflation in the lower house of Parliament in New Delhi today. “If I compromise my economic growth, I can surely control inflation.”

Mukherjee’s comments came after opposition parties stalled proceedings in Parliament and stepped up criticism of Prime Minister Manmohan Singh for rising prices. At least one central banker said that the Reserve Bank of India needs “more aggressive” monetary policy tightening, two days after Governor Duvvuri Subbarao raised rates for the fourth time since March.

“We expect the Reserve Bank to continue with its measured increase in policy rates to balance growth and inflation objectives,” said Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc. She expects the RBI to increase its repurchase rate by half a percentage point by the end of March.

The bank on July 27 raised the reverse repurchase rate to 4.5 percent from 4 percent and the repurchase rate to 5.75 percent from 5.5 percent, saying it has “calibrated” stimulus exit to India’s “specific growth-inflation dynamics.”

Stocks, Bonds

The yield on the 10-year government bond climbed 3 basis points to 7.84 percent at the 5 p.m. close in Mumbai, the Bombay Stock Exchange’s Sensitive Index rose 0.6 percent while the rupee was little changed at 46.16 against the dollar.

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

As India battles to slow inflation, the Reserve Bank today stripped powers of a deputy governor who indicated the bank would raise rates days before an unscheduled July 2 move.

K.C. Chakrabarty lost control over the departments of rural planning, credit and payments and settlement. He said June 28 that the central bank would raise rates anytime.

The Economic Times said today Chakrabarty has been divested of his portfolios after saying July 29 that monetary policy tightening should be more aggressive.

Chakrabarty told Bloomberg News he hasn’t given any comment “in public,” and added that he may have a different view in private.

‘Routine’ Affair

RBI spokeswoman Alpana Killawala said the portfolio reshuffle is a “routine” affair. “We do this kind of shuffle on a need basis,” Killawala said in an interview from Mumbai.

As part of a strategy to counter inflation, the central bank plans to release monetary-policy statements every six weeks instead of once a quarter, according to the July 27 release. The next announcement will be on Sept. 16.

Inflation in India may accelerate by about a percentage point, the finance ministry estimated, after Prime Minister Singh on June 25 allowed state-run refiners including Indian Oil Corp. to raise prices of gasoline and diesel to cut fuel subsidies and narrow the budget deficit from a 16-year high.

“Mukherjee has improved his budget at the cost of dismantling the common man’s budget,” said Sushma Swaraj, leader of the opposition in the lower house of Parliament. “The government’s anti-people policy has put everyone, from common man to small businesses under extreme stress.”

Monsoon Rains

Mukherjee said inflation is likely to slow as sufficient monsoon rains, the main source of irrigation in India, boosts farm production this year.

Inflation started picking up after a drought last year created food shortages. It accelerated as consumer demand strengthened for manufactured goods and services.

India received more rainfall last month than forecast by the weather office, aiding sowing of sugar cane, rice and lentils. Rains in July, the wettest month of the June-September monsoon season, were 102.5 percent of the 50-year average of 292.4 millimeters, D. Sivananda Pai, a director at the India Meteorological Department, said this week from Pune, India.

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