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Indian Adviser Sees Rate Increase as Food Prices Gain

Persistent price gains may require an interest-rate increase in India this month, Chakravarthy Rangarajan, the prime minister’s top economic adviser, said as food inflation and exports climbed.

“There are still three more weeks before the monetary policy action and the Reserve Bank of India should watch the behavior of the prices,” Rangarajan, 78, chairman of the Prime Minister’s Economic Advisory Council, said in an interview yesterday in Gurgaon, near New Delhi. “If prices continue to remain sticky, then probably some action will be required.”

India’s exports climbed 36.4 percent to $22.5 billion in December, Trade Secretary Rahul Khullar said in New Delhi today. Food inflation accelerated 18.32 percent in the week ended Dec. 25, the fastest pace since July, a report showed Jan. 6

Prime Minister Manmohan Singh’s government is under pressure to curb rising costs including vegetables such as onions, a key ingredient in local cuisine. India’s nine-year government bond yields surged to the highest level in a month yesterday on speculation the RBI will boost borrowing costs.

“The upside risks to inflation have increased in recent weeks after the surge in food prices,” said Dharmakirti Joshi, a Mumbai-based economist at Crisil Ltd., the local unit of Standard & Poor’s Ratings Services. “Inflation is a huge political risk and policy makers will go all out to damp it.”

Next Meeting

Joshi expects the central bank to increase rates by a quarter-point in its next monetary policy meeting on Jan. 25. The RBI’s benchmark repurchase rate is 6.25 percent.

Governor Duvvuri Subbarao, who raised rates six times in 2010, the most in Asia, held off on boosting borrowing costs in the last policy statement on Dec. 16 as a record 1.1 trillion rupees ($24.2 billion) of share sales by companies including Coal India Ltd. caused a cash squeeze at lenders.

The RBI’s open-market operations and government spending have improved the availability of cash in the banking system and the monetary authority can change its bond repurchase target depending on liquidity, Deputy Governor Shyamala Gopinath told reporters in the northern Indian city of Udaipur today.

The central bank will review interest rates and inflation estimates at its meeting later this month, she said.

The yield on the benchmark 7.80 percent bond due in May 2020 rose seven basis points to 8.20 percent as of the 5 p.m. close in Mumbai yesterday. The Bombay Stock Exchange’s Sensitive Index, which was the best performer among the world’s 10 biggest equity markets in 2010, fell 2.4 percent while the rupee declined 0.3 percent to 45.38 against the dollar.

Spending Power

In the past 15 years, Indians have voted out at least two national governments after inflation eroded the spending power of the poor. The World Bank estimates 828 million Indians live on less than $2 a day.

Inflation of more than 6 percent between 1994 and 1996 helped oust Prime Minister P.V. Narasimha Rao. His Congress party-led government lost to the Bharatiya Janata Party, which was voted out in May 2004 after prices rose in eight of the 12 months that preceded the poll.

Singh, 78, wants to curb inflation ahead of elections in nine states over the next 18 months including in the northern province of Uttar Pradesh, which sends a seventh of all lawmakers to the national parliament.

Inflation Forecast

Finance Minister Pranab Mukherjee on Dec. 30 raised his inflation forecast for the year through March after food prices gained. The inflation rate may be “around” 6.5 percent by March 31, Mukherjee said, more than the 6 percent prediction he made on Dec. 14. The rate was 7.5 percent in November.

Food inflation climbed to 18.32 percent in the week ended Dec. 25 from a year earlier, according to a commerce ministry statement in New Delhi on Jan. 6. Onion prices soared 80 percent during the week.

Singh’s government is concerned that high food costs for a sustained period will lead to more wage demands, stoking inflation.

“If food-price inflation persists for a long time, it also feeds into the rest of the sectors in the economy,” Rangarajan said. “We really need to watch the behavior of food prices.”

Mukherjee yesterday urged state chief ministers to ensure removal of all “bottlenecks” in the supply of food items. Earlier, the government asked state-run companies to sell onions at prices lower than market rates.

India is also seeking to import the vegetable from Pakistan, Foreign Minister S.M. Krishna said in New Delhi yesterday.

The government will also distribute an additional 5 million tons of grain to states at subsidized prices, Agriculture Minister Sharad Pawar said Dec. 28. A ban on the export of lentils will be extended beyond Dec. 31 and the government will continue with the stock-holding limit on sugar for another three months until March 31, Pawar said.

“The food inflation level has been worryingly high despite good monsoon rains this year,” Subir Gokarn, a deputy governor at the central bank, said in the Indian city of Indore Jan. 6.

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